M/S. GOTAN LIMESTONE KHANJI UDHYOG (GLKU), A partnership firm, held mining lease for mining limestone at village Dhaappa, Tehsil Merta, District Nagaur in area of 10 sq. km at fixed rent of Rs. 1,42,85,224/- per annum for which third renewal for 30 years was granted w.e.f. 8th April, 1994. The said lessee applied for transfer of the lease in favour of respondent No. 1 herein, M/s. Gotan Limestone Khanji Udhyog Pvt. Ltd. (GLKUPL) on 28th March, 2012. The application dated 28th March, 2012 states that the lessee was a partnership firm and wished to transfer the lease to a private limited company which was mere change of form of its own business by converting itself from a partnership firm into a private limited company. The partners of the firm and Directors of the company were the same and on transfer, no illegal benefit, price or premium was taken from the transferee. The lease was 40 years old and there was no impediment in the transfer. The transferee will comply with the rules and regulations. The transfer was allowed on 25thApril, 2012 on that basis. After seeking the said permission, the newly formed private limited company instead of operating the mining lease itself sold its entire shareholding to another company allegedly for Rs. 160 crores which is alleged to be the sale price of mining lease.
On this development, a show cause notice dated 21st April, 2014 was issued to Respondent No. 1 proposing to cancel the transfer order on the ground that contrary to the statement in the application for transfer that the partners of the partnership firm will be Directors of the private limited company, the Director of the private limited company who were partners of the firm were replaced by new Directors on 6th August, 2012 and the private limited company was listed as subsidiary of Ultra Tech Cement Limited Company (UTCL) with the Bombay Stock Exchange. This development showed that the transfer was secured by a conspiracy and in circumvention of the rules.
Respondent No. 1 contested the show cause notice. In its reply, it stated that the State Government itself had defended the transfer in its afidavit in reply to theWrit Petition No. 404 of 2013 filed by M/s. J.K. Cement Limited (JKCL). There was no bar to the change of Directors and shareholding of a company under the rules. Thus, transfer of shareholding and change of Directors did not amount to transfer of mining lease nor it affected validity of permission for transfer from GLKU to GLKUPL.
This stand was held to be unsatisfactory by the competent authority. Accordingly the order dated 25th April, 2012 was rescinded and declared void vide order dated 16th December, 2014. It was also observed that the department had filed its revised reply before the High Court and according to the said reply, the transfer was in violation of Rule 15 of the Rajasthan Minor Mineral Concession Rules, 1986 (the Rules).
It appears that an FIR dated 7th August, 2014 was also registered with the Jaipur Main Police Centre on a complaint of one Dr. Kirit Somaiya on the allegation that GLKU had sold the mining lease to UTCL which was not permissible and thereby unlawful gain was acquired in connivance with the mining department and loss was caused to the State. The erstwhile partners of the firm which was original lessee, had in effect transferred the lease in favour of S/Shri K.C. Birla, R. Mehnot and M.B. Agarwal who took over as Directors of the Private Limited Company at the instance of UTCL.
The respondent no. 1 filed S.B. Civil Writ Petition No. 9669 of 2014 seeking quashing of show cause notice dated 21st April, 2014, the order dated 16th December, 2014 and other consequential orders. It was submitted that the order dated 25thApril, 2012 permitting transfer of lease from the partnership firm to the private limited company was in order. After the said transfer, the entire shareholding of the company was transferred by the promoter directors in favour of UTCL in July, 2012, except some shares which were transferred in joint names of UTCL with some private persons who were employees of the said company . Thus, the writ petitioner – RespondentNo.1becamewhollyownedsubsidiaryof UTCL. The Directors were replaced by the nominees of the holding company. JKCL had made an application seeking permission of part transfer of the mining lease and its application was rejected on 5th Septembe,r 2012 against which Writ Petition No. 404 of 2013 was filed. The State Government in its reply defended its order dated 25th April, 2012. After the assembly election in December, 2013, show cause notice dated 21st April, 2014 was issued and a supplementary reply was filed by the State in October, 2014 taking a different stand. It was submitted that the order dated 16th Decembe,r 2014 had not dealt with the objection regarding applicability of Rule 72 (treating the lease void) and the judgements relied upon by the writ petitioner in its reply. Change in the pattern of shareholding and directorship of the company was of no consequence for purposes of the Rules. The mining rights are vested in the writ petitioner company as a consequence of order dated 25th April, 2012 and change in pattern in shareholding or directorship did not affect the said rights. Shareholders and directors are not the owners of the assets of the company. Company was a distinct entity and mining lease was owned by the Company.
The writ petition was defended by the State with the plea that change of all the directors and shareholding amounted to transfer of the lease in violation of Rule 15 which was void under Rule 72. Thus, the order dated 16th December, 2014 was valid.
JKCL, who had applied for transfer of part of mining lease and was aggrieved by rejection of its application moved an application before the High Court for being added as a party to oppose the writ petition and was impleaded as a respondent in the writ petition, vide order of the High Court dated 28th January, 2015. The impleaded party supported the order of cancellation inter alia on the ground that one of the conditions in the order dated 25thApril, 2012 was that the document of transfer was to be executed within three months which was not done. Further, the transfer of entire shareholding by the newly formed company was indirect way to transfer the lease for consideration by GLKU to UTCL which was not legally permissible.
The main issue framed by leaned Single Judge for consideration was as follows:
Whether the action of shareholders of the Company in transferring its shares to Ultra Tech Cement Limited and consequently, the Company becoming wholly owned subsidiary of Ultra Tech Cement Limited amounts to violation of Rule 15(1)(b) of the Rules is the issue which requires consideration.
After referring to the decisions of Supreme Court in Bacha F. Guzdar v. CIT [AIR 1955 SC 74], Heavy Engineering Mazdoor Union v. State of Bihar [1969 (1) SCC 765], Electronics Corporation of India Limited v. Secretary, Revenue Department [JT 1999 (5) SC 608], Amit Products 9India) Ltd. v. Chief Engineer (O&M) Circle [JT 2005 (8) SC 144] and Balwant Raj Saluja & Anr. v. Air India Limited & Ors. [JT 2014 (9) SC 562] learned Single Judge concluded as follows:
In view of the law laid down by the Hon’ble Supreme Court in the case of Government Companies, inter-se relationship between holding and subsidiary Companies and fundamental principles regarding distinction between a shareholder and the Company, it is apparent that merely on account of the Company becoming a subsidiary of UltraTech Cement Limited on account of certain action of the shareholders of the Company. It cannot be said that the Company is being directly or indirectly financed to a substantial extent or the Company’s operations or undertakings ae substantially controlled by UltraTech Cement Limited, regarding which there are absolutely no allegations or material whatsoever .
Therefore, on account of the petitioner- Company becoming subsidiary of Ultra Tech Cement Limited, in view of the law laid down by the Hon’ble Supreme Court as noticed hereinbefore, it cannot be said that ipso facto the provisions of Rule 15(1)(b) of the Rules have been violated by the lessee i.e. petitioner- Company.
Aggrieved by the judgement of the learned Single Judge, the appellant and the impleaded party JKCL filed appeals before the Division Bench of the High Court which have been dismissed by impugned order dated 14th May, 2015. The Division Bench while afirming the view taken by the learned Single Judge, inter alia, observed:
47. We entirely agree with the reasons assigned by learned Single Judge that no material has been placed on record to suggest that the transfer of the mining lease from the partnership firm to a Private Limited Company was made with a design to ultimately transfer the shares to UltraTech Cement Limited.There is no evidence to suggest any such design or attempt at the time when the application was made for transfer of mining lease by the partnership to the Private Limited Company. 48. We also do not find any case of cheating or fraud in the transfer of mining lease by either the partners of the partnership firm or the Directors of the Private Limited Company, for which the officers of the Mining Department and competent authority could be liable or any criminal action can be taken against them. The competent authority had fully understood and had acted in accordance with the law, on the facts placed before it, in granting consent in writing before transfer of mining lease from the partnership firm to the Private Limited Company. The State Government in its reply in the Writ Petition No. 404/2013 had taken a correct stand in defence of the transfer of mining lease. It appears that with the change of Government, the loyalties changed from one business group to another, and the State Government not only initiated action by issuing show cause notice for declaring the permission for transfer to be null and void, but also proposed to take action against its officers for granting permission. The entire action to cancel the lease was actuated with malice in law. An additional affidavit was filed in the writ petition filed by M/s J.K. Cement Limited changing the stand of the Government in triggering action apparently to the benefit of M/s J.K. Cement Limited, instrumental in blocking the expansion of capacity of production of cement by Ultra Tech Cement Limited.
49. Though we find that learned Single Judge has not gone into and recorded any finding on malice in law, the facts placed before us and the arguments advanced clearly indicate that the entire action was coloured with malice in law. The object and purpose of declaring the permission for transfer to be null and void and cancellation of mining lease was for the purpose of restricting the expansion of business activities of Ultra Tech Cement Limited owned by Birla Group of Companies in the State of Rajasthan.
Against the judgment of the Division Bench, State of Rajasthan filed special leave petition. The Supreme Court accepted the appeal, set aside the judgement of the High Court. The Supreme Court, however, directed the State of Rajasthan to frame and notified its policy in matter within one month from the receipt the copy of Order. The State of Rajasthan was told to pass an appropriate order in respect of mining lease in question in the light of the policy so framed. Till such a direction was taken, status quo was directed to be maintained.
The operative part of the judgement read as under :
In the present case there are two transactions. Viewed separately, there may be nothing wrong with either or both but if real nature of transaction is seen, the illegality is patent. In first transaction of transfer of lease from the firm to the company, with the permission of the competent authority, only disclosure made while seeking permission for transfer is of transforming partnership business into a private limited company with same partners as directors without their being any financial consideration for the transfer and without there being any third party. There is perhaps nothing wrong in such transfer by itself. In the second transaction, the entire shareholding is transferred for share price and control of mining lease is acquired by the holding company without any apparent price for lease. Technically lease rights are not sold, only shares are sold. No permission for transfer of lease hold rights may be required. Let us now see the combined effect and real substance of the two transactions. The partnership firm holding lease hold rights has successfully transferred the said rights to a third party for consideration in the form of share price which is nothing but price for sale of mining lease which is not allowed and for which no permission has been granted. Thus, if these facts were disclosed to the competent authority, permission for transfer of mining rights for financial consideration could not be allowed. Mining rights belong to the State and not to the lessee and the lessee has no right to transfer by trading such rights. In fact the lessee has also not claimed such a right. Lessee can either operate the mine or surrender or transfer only with the permission of the authority as legally required. In the present case, the lessee has achieved indirectly what could not be achieved directly by concealing the real nature of the transaction. Is it legally permissible, is the question.
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The principle of lifting the corporate veil as an exception to the distinct corporate personality of a company or its members is well recognized not only to unravel tax evasion, but also where protection of public interest is of paramount importance and the corporate entity is an attempt to evade legal obligations and lifting of veil is necessary to prevent a device to avoid welfare legislation. It is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of the public interest, the effect on parties who may be affected etc.
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It is thus clear that the doctrine of lifting the veil can be invoked if the public interest so requires or if there is allegation of violation of law by using the device of a corporate entity. In the present case, the corporate entity has been used to conceal the real transaction of transfer of mining lease to a third party for consideration without statutory consent by terming it as two separate transactions-the first of transforming a partnership into a company and the second of sale of entire shareholding to another company. The real transaction is sale of mining lese which is not legally permitted. Thus, the doctrine of lifting the veil has to be applied to give effect to law which is sought to be circumvented.
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Thus, acquisition of mining lease contrary to rules is void. Requirement of previous consent cannot be ignored nor taken to be formality subject only to pay deed rent or agreeing to follow same terms. The lessee privately and unauthorisedly cannot sell its rights for consideration and profiteer from rights which belong to State. There is no warrant for any contrary assumption. The State has to exercise its power of granting or refusing permission for transfer of lease in a fair and reasonable manner but following doctrine of public trust. This Court has held that the State cannot overlook illegal transfers. Goa Foundation v. Union of India [JT 2014(5) SC 486].
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As already seen, in the present case, the original lessee sought transfer merely by disclosing that the partnership firm was to be transformed into a private limited company with the same partners continuing as directors and there was no direct or indirect consideration involved. It was specifically declared that no pecuniary advantage was being taken in the process which is clearly false. The permission to transfer the lease in favour of a private limited company was granted on that basis. Thus, it was a case of suppression very and suggestio falsi. Once it is held that transfer of lease is not permissible without permission of the competent authority, the competent authority was entitled to have full disclosure of facts for taking a decision in the matter so that a private person does not benefit at the expense of public property. The original lessee did not disclose that the real purpose was not merely to change its partnership business into a private limited company as claimed but to privately transfer the lease by sale to a third party. This aspect has also escaped the attention of the High Court. Accordingly, our answer to the question framed is that in the facts of the present case, sale of shareholding by GLKUPL to UTCL is a private unauthorized sale of mining lease which being in violation of rules is void. GLKUPL has been formed merely as a device to avoid the legal requirement for transfer of mining lease and to facilitate private benefit to the parties to the transaction, to the detriment of the public.
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Learned single Judge and the Division Bench have gone by only one aspect of law, i.e. the general principle that sale of shares by itself is not sale of assets but this principle is subject to the doctrine of piercing of corporate veil wherever necessary to give effect to the policy of law. In the present case, this principle clearly applies as transfer of shares to cover up the real transaction which is sale of mining lease for consideration without the previous consent of competent authority, as statutorily required. The statutory requirement is sought to be overcome with the plea that it was a transaction merely of transfer of shareholding when on the face of it the transaction is clearly that of sale of the mining lease. In view of the above, the view taken by the High Court cannot be sustained.
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Accordingly, this appeal is allowed and the judgement of the High Cour t is set aside. W e, however, direct the State of Rajasthan to frame and notify its policy in the matter within one month from the receipt of a copy of this order. The State of Rajasthan may within one month thereafter pass an appropriate order in respect of the mining lease in question in the light of the policy so framed. Till such a decision is taken, status quo may be maintained.
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Authorities relied upon : 2013 (7) SCC 571, 1985 (4) SCC 114, 1985 (3) SCC 230, 1982AC 300, 1981 (2) SCC 205, 1976 (4) SCC 108, 1969 (1) SCC 765, 1967 (1) SCR 934, AIR 1955 SC 74, 1936AC 1.
Reference : Supreme Court. State of Rajasthan & Ors. v. Gotan Lime Stone Khanji Udyog Pvt. & Anr., civil appeal no. 434 of 2016.