Arbitrator Has No Power To Pierce The Corporate Veil Or Fasten Liability On Non-Signatory; Madras High Court Partly Sets Aside Arbitral Award In Rs 2.5 Crore Loan Dispute
Sanchayita Lahkar
The High Court of Madras Single Bench of Justice N. Anand Venkatesh, hearing a challenge to an arbitral award arising from a memorandum of understanding under which a transport company advanced Rs. 2.5 crore to a borrowing company for a performance bank guarantee, has partly set aside the award. The Court held that the arbitrator exceeded jurisdiction in treating a third company as the lender’s sister concern, lifting the corporate veil to treat that non-signatory as an alter ego and then finding breach of contract on that basis. Clarifying that such an exercise lies with courts and not arbitral tribunals, the Bench modified the award to direct the borrowing company to refund the Rs. 2.5 crore loan with interest at 12% per annum from 11 December 2015 until payment, while disallowing the counter-claim for damages.
The dispute arose from a memorandum of understanding dated 11 December 2015 under which the petitioner company agreed to provide the respondent company financial assistance of Rs. 2.5 crore as margin money for a performance bank guarantee of Rs. 3.52 crore required under a work order issued by Kolkata Port Trust. The amount was to be repaid within 30 to 89 days. As security, the respondent executed a promissory note, issued a post-dated cheque and furnished collateral, including shares.
The petitioner alleged that the respondent did not repay the amount and the cheque was dishonoured, leading to initiation of arbitration seeking recovery of Rs. 2.5 crore with interest at 24% per annum. The petitioner maintained that the transaction was purely financial and that the arbitrator could not lift the corporate veil.
The respondent contended that the arrangement covered both finance and execution of the port work, with an understanding to share profits and losses and to arrange equipment through a special purpose vehicle. It claimed breach by the petitioner, loss of the work order and forfeiture of the bank guarantee, and sought substantial counter-claims. Evidence included oral testimony from one witness for each side and documentary exhibits (Ex.C1–C59 and Ex.R1–R30). The challenge before the High Court invoked Section 34 of the Arbitration and Conciliation Act, 1996 and Section 73 of the Indian Contract Act, 1872.
The Court recorded that “the MoU entered into between the parties only pertained to the financial assistance given by the petitioner, that there was absolutely no mention in the MoU about providing of any equipment” and that the allegation of such obligations arose only from later documents involving a third entity. It also noted that the arbitrator had “exercised the jurisdiction of lifting the corporate veil, which power was not available to an Arbitrator.”
Discussing the MoU dated 11.12.2015, the Court observed that it “constituted an independent financial arrangement between the parties de hors the other terms of the MoU.” It further recorded that the National Company Law Appellate Tribunal had already held the transaction to be a standalone financial arrangement, a finding later affirmed by the Supreme Court.
Addressing the arbitrator’s reasoning, the Court stated that the arbitrator “virtually lifted the corporate veil and came to the conclusion that the failure on the part of the said M/s. Collate Consultants Pvt. Ltd. to supply the equipment must be considered to be a failure on the part of the petitioner.” It recorded that such an approach “went wrong in applying the doctrine of lifting the corporate veil/determining another entity as the alter ego and fastening the liability on the petitioner.”
In support of its conclusion, the Court noted that “an Arbitrator will not have the power to pierce the corporate veil so as to bind another entity, which was not a party to the agreement.” It reiterated that “the Arbitral Tribunal certainly does not have the jurisdiction to lift the corporate veil since its jurisdiction is confined by the arbitration agreement.”
Regarding damages, the Court stated that the respondent had not provided sufficient pleadings or evidence, noting that “there is a total lack of pleadings to substantiate the counter claim.” It recorded that the arbitrator had himself found the counterclaim “within the realm of uncertainty.”
The Court further remarked: “There was absolutely no basis for fixing this amount towards damages… This is more so since this amount included a sum of Rs.2.50 Crores that was contributed by the petitioner.” It observed that “the respondent, not having pleaded and proved the actual loss or damages suffered by them, cannot be granted any sum towards damages as a windfall.”
Summarising the legal position, the Court recorded that “a mere breach of the contract will not automatically result in the payment of damages unless a party is able to show that such loss or damage had arisen naturally in the usual course of things from such breach.”
The Court stated that “the above original petition is partly allowed” and recorded that “the award passed by the learned Arbitrator is partly set aside and is modified. There shall be a direction to the respondent to pay a sum of Rs.2,50,00,000/- (Rupees two crores and fifty lakhs only) to the petitioner along with interest at the rate of 12% per annum from 11.12.2015 till the date of actual payment.”
“The invalid portion of counter claim awarded along with interest is severable from the valid portion of the award directing the respondent to pay a sum of Rs.2.50 Crores along with interest. Hence, the award can be modified.”
Advocates Representing The Parties
For the Petitioner: Mr. Nithyaesh Natraj for M/s. Nithyaesh & Vaibhav
For the Respondent: Mr. J. Ravikumar
Case Title: M/s. Sugesan Transport Pvt. Ltd. vs. M/s. E.C. Bose & Company Pvt. Ltd.
Neutral Citation: 2025: MHC:2699
Case Number: Arb.O.P.(Com.Div.) No.10 of 2021
Bench: Justice N. Anand Venkatesh
