Promoter family agreements: Binding on companies?

Four years after the Ambani family came to a historic agreement - an agreement that led to a split in the ownership of the Reliance empire and effected the de-merger of 4 companies - the two Ambani brothers are back in court. This time, in the Supreme Court, with the two brothers locked in battle over Reliance Industries gas reserves.

This case will decide many things; how our courts view family agreements, the fate of India’s gas policy, the government's role in a private dispute over national assets, and finally the big question - can private promoter agreements be binding on their companies? We don't know how the Supreme Court will rule, but we do know what judges in the past have had to say on the matter. Isha Dalal digs up case law to get you some answers.

Promoter… Chairman… Managing Director! In fact, the “alter ego” of Reliance Industries itself!

At least, that’s what the Bombay High Court called Mukesh Ambani in its 2007 judgment on the RIL-RNRL gas dispute. The judgment said the family MoU between the two brothers was binding on Reliance Industries because

“As per the doctrine of identification a company is ‘identified’ with such of its key personnel through whom it works. Such personnel are the very alter ego of the company and their actions are deemed to be the actions of the company itself … Hence the Company RIL is deemed to be aware of and fully bound by the actions of it’s Managing Director”.

Akil Hirani, Managing Partner, Majmudar & Co

The doctrine of identification is a derivative from English law and there have been rulings in England where it has been held that if someone purports to be the company or responsible for the company and he does an action, then he identifies with the company then the company cannot renege their liability vis-à-vis this action.

In fact, that 1972 British ruling was cited by the Bombay HC in the Ambani judgment. The British ruling said that: “[a corporation] must act through living persons, though not always one or the same person. Then the person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his acts is the mind of the company”

A judgment that has been cited and applied by the Indian Supreme Court more than once

instance, in a 1994 ruling, an Income Tax commissioner in Bangalore was allowed to hold a textile company criminally liable for misreporting perpetrated by its Managing Director

The court held that the company’s “active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and center of the personality of the corporation.”

Three years later, while determining the liability for a bus accident in the state of Karnataka, the apex court established the bus company’s guilt on the basis of the “doctrine of identification”.

Now most case law supporting the doctrine of identification arises out of criminal liability matters. That is the doctrine makes a company accountable for the wrong doing or criminal actions of its directors or key employees. But, experts say the doctrine of identification may also bind a company to contracts entered into by the person in control

Vivek Daswaney, Partner, V Law Partners

If the person making the contract is someone apparently authorized, or the nerve center or the mind or the “alter ego” of the company I see no reason why a person executing a contract with him cannot be justified in relating that he is signing or is the representative of the company and he is representing the company. Why the whole confusion is happening is because the doctrine of identification, the terminology is always to equate a guilty mind with that of the corporation. When actually the doctrine persay is to equate an act, conduct or state of mind with that of a corporation, rather than a guilty mind.

So there is case law to uphold the doctrine of identification in matters where an individual is “acting in the course of employment” or while striking a business agreement. But what if the director enters into a private agreement? Then does the doctrine of identification make a private agreement binding on the company?

Suresh Talwar, Partner, Talwar Thakore & Associates

In a private agreement, the kind that you’re referring to, it’s outside the scope of the company because its not been tabled before the board.

Akil Hirani, Managing Partner, Majmudar & Co

If someone says they’re acting in the course of employment, then the proof of that would be board resolution giving a certain authority for a person to carry out a certain action. If you don’t have a board resolution, then you have to think about what his authority is.

So it's likely that the Supreme Court will examine the Board's role in endorsing and giving effect to various clauses in the private agreement or in this case the family MoU. But even that may not be the clincher.

Vivek Daswaney, Partner, V Law Partners

Let me clarify most of the judgments on corporate criminal liability- most of them are ad hoc decisions. No such decision I have come across which relies on a set principle of jurisprudence. So we are looking at decisions that are ad hoc that are relying on the facts of that particular case rather than a set pattern

Akil Hirani, Managing Partner, Majmudar & Co

It has not been done but that doesn’t mean it cannot be done! So it all boils down to what is the detriment to the country party. So if someone has acted on an averment made by a CEO or MD, if the detriment is going to be significant, then the court will apply this doctrine although it may give rise to other liabilities between company and CEO/ MD which is another issue. So it all boils down to the balance of convenience and the detriment to the counter party.

A balance of convenience that the Supreme Court will now decide on.

In fact, just last week in court, RIL counsel Harish Salve argued that it would be a dangerous trend if promoters are allowed to have side-deals and that a secret agreement between promoters should not be binding on a company that has 3 million shareholders! Will the court buy that argument?