Representative Suit Against NSEl, FTIL: Will it Succeed?

Published on Sat, Mar 08,2014 | 14:16, Updated at Sat, Mar 08 at 14:16Source : CNBC-TV18 | Watch Video :

In 2005, accounting scandal ridden Worldcom settled a class action suit for $6.2 billion. 3 years later, Enron agreed to pay its investors $7.2 billion in the largest ever settlement for securities litigation. Class action suits make headlines in the U-S every now and then. Back home, our companies law has just woken up to the concept. But a close cousin of class action is a representative suit under the Civil Procedure Code- the biggest one is playing out in our times against NSEL, its promoter- FTIL, and its management. Payaswini Upadhyay asks experts if this is likely to become India's WorldCom and Enron in the jurisprudence of representative suits.

The House of Lords in the UK dwelled on the issue of corporate veil as far back as in 1897 and held that the company is not in law the agent of the subscribers or trustee for them…nor are the subscribers as members liable, in any shape or form. The exception to this judgment came in the Gilford Motor case that allowed corporate veil to be lifted when the corporate personality is being blatantly used as a cloak for fraud or improper conduct. In India too, the Supreme Court has found it fit to lift the corporate veil where fraud is intended to be prevented or where corporate character is employed for the purpose of committing illegality or for defrauding others

"…company is not in law the agent of the subscribers or trustee for them…nor are the subscribers as members liable, in any shape or form…"- - House of Lords, Salomon vs Salomon, 1897

"…when the corporate personality is being blatantly used as a cloak for fraud or improper conduct, courts can disregard the corporate veil.."- Court of Appeal, Gilford v Horne, 1933

"…where fraud is intended to be prevented…the veil of corporation is lifted by judicial decisions..."- SC, Tata Engineering & Locomotive Company vs State of Bihar (1964)

"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…"- SC, DDA vs Skiper Construction, 1996

I recapped the relevant jurisprudence on corporate veil for you because the success of the representative suit brought by Modern India and three others against NSEL, FTIL, their promoters, directors and senior officers hinges on whether the Bombay High Court will find this suit a fit case for lifting the corporate veil.

Last month, Modern India and 3 others who had entered into contracts for the purchase and sale of commodities on NSEL filed a representative suit in the Bombay High Court under Order 1 Rule 8 of the Civil Procedure Code. They have claimed that FTIL, its promoters and directors incorporated NSEL with the sole objective of duping innocent members of the public and that NSEL had willfully and deliberately listed commodities for trade in its exchange without ensuring that the underlying physical commodities were available and deposited in its custody.

Sitesh Mukherjee

Partner, Trilegal"What the plaintiffs have said is that they, as investors, participated in buying and selling of commodities on NSEL and on account of the fraud committed by NSEL, its personnel and its promoters, they have suffered damages and they also say that there are several other investors who similarly used the NSEL platform. And so they have plead to the court that they be allowed to not only sue on their own behalf but also on behalf of various investors who are similarly situated as they are."

Umakanth Varottil

Assistant Professor, National University of Singapore

"A claim against NSEL may be successful on the law but it may not make any commercial difference because they may not be able to recover the kind of amounts we are talking about which is the tune of Rs 5,500 cr."

And it's here that the concept of lifting the corporate veil assumes importance. Modern India has claimed that NSEL has no valuable assets to repay its investors the outstanding amount of over Rs 5000 cr and FTIL as the holding company of NSEL and as the perpetrator of fraud should be held liable. In its representative suit, Modern India had 3 others have pleaded that until the case reaches fruition, FTIL, NSEL, their promoters should be restrained from disposing off their properties.

Sitesh Mukherjee

Partner, Trilegal

"If fraud is proved, then the court will lift the corporate veil – if they can show that the whole platform of NSEL was initiated in order to perpetrate fraud by its promoters and its holding companies and so, they should be held liable. There is one other aspect to it. If they are not able to prove fraud but they are able to prove fraudulent misrepresentation, I am not sure if they'll be able to trace their remedies to the holding company of NSEL or their promoters. So a certain amount of personal dishonesty, personal involvement in the perpetration of fraud would be necessary to be proved to claim reliefs from entities and individuals around NSEL."

Umakanth Varottil

Assistant Professor, National University of Singapore

"The second question which has come up in previous similar circumstances is the fact that perhaps the plaintiffs are entities which have the requisite sophistication, they should have conducted due diligence; they should have asked for more information and should not have blindly entered into these contracts. If you recall this kind of argument was raised in the whole derivatives saga that occurred in 2008-2009 that was not accepted by the Madras HC in the Axis Bank-Rajshree Sugars case. So this could be another defense that the plaintiffs entered into this with their eyes open – they should have exercised greater due diligence."

It seems like a long drawn out battle between the contracting parties and NSEL and its parent FTIL. Since this is a representative action and not a pure class action where the affected come together to file the suit, the court will have to be first satisfied that the subject matter is of interest to sufficient number of investors. The court will then put out a notice for affected parties to join the suit who can then claim damages. The outcome is critical not only because of the huge amounts involved but also because this case will set important precedents for class action suits that await our courts under the new Companies Act.