India: CHALLENGING STATE ACTIONS AGAINST A COMPANY ON THE TOUCHSTONE OF ARTICLE 19(1)(g): IS IT TIME THAT EMPLOYEES/DIRECTORS BE PERMITTED TO MAINTAIN SUCH ACTIONS?

Introduction

The Supreme Court in its recent decision in Kaushal Kishor v. The State of Uttar Pradesh¹, while relying upon the transformative jurisprudence relating to the interpretation of Articles 19 and 21 of the Constitution of India has held that the initial understanding that fundamental rights can only be claimed against the State has changed, and today, rights under Article 19 and 21 of the Constitution can also be enforced against persons other than the State or its instrumentalities. The expansive interpretation adopted by the Supreme Court ensures the continued relevance of the Fundamental Rights to meet the challenges of today's day and age.

In the same vein, the need of the hour is to ensure that Indian employees / directors of corporate entities are not left remediless when the corporate entity in which they are engaged is subjected an unconstitutional state action.

Article 19(1)(g) of the Constitution of India ("Constitution") guarantees to all citizens the freedom to practice any profession or to carry on any occupation, trade or business. Since in terms of the Constitution and the Citizenship Act, 1955 only a 'natural person' is considered to be a citizen, companies or corporations (despite being incorporated in India) are not entitled to the freedom guaranteed under Article 19(1)(g).

Relevantly, judicial pronouncements have evolved over time to pave the way for shareholders to enforce their respective freedoms under Article 19, in cases where state action against the company in which they hold shareholding impacts them as well. However, a similar corresponding right has not been expressly extended to the employees/directors of companies against State action specifically impacting the company in which the employees/directors are engaged.

In today's age of ever-mushrooming start-up entities, the emoluments payable to directors and employees are quite often linked to the performance of the entity. Therefore, any infringement of legal rights of companies affecting its business operations, would have a material impact on the financial interests of its employees/directors as well. The same thus reignites the issue whether employees/directors of companies incorporated in India, who are Indian citizens, ought to be permitted to challenge a state action against a company on the touchstone of Article 19(1)(g).

This article addresses the aforementioned issue in two parts. The first section maps the development of law on the aforementioned issue, as enunciated in various judicial precedents passed by the Supreme Court of India ("Supreme Court") and the various High Courts. The second section explores the basis for and right(s) of employees / directors to challenge state action against the companies with which they are engaged.

Judicial Position

• Pre-R.C. Cooper: The Restrictive Approach

Up to the year 1960, the issue of whether companies were at liberty to raise challenges to state actions on the basis of infringement of rights under Article 19(1)(g) of the Constitution remained an issue on which various courts had returned conflicting observations and findings. While the Bombay High Court in State of Bombay v. R.M.D. Chamarbaugwala,² expressly held that a company was a 'citizen' of India for the purposes of raising a challenge under Article 19(1)(g), the Madras High Court in Narasaraopeta Electric Corporation Ltd. v. State of Madras,³ held that Article 19(1)(f) applies only to citizens and a company incorporated under the Companies Act does not satisfy the requirements of the definition of 'citizen' as under the Constitution.

Given the conflicting views being adopted by Courts in India, the Supreme Court in State Trading Corporation v. Commercial Tax Officer⁴ considered the issue whether a company registered under the Indian Companies Act, was a 'citizen' entitled to the freedoms under Article 19(1)(g). While considering the same, the Supreme Court observed that the rights conferred by Article 19 are confined to natural persons who are citizens and that a corporation, not being a citizen, is not entitled to any rights included in that Article.

This view was subsequently reiterated in the decision of the constitutional bench of Supreme Court in Tata Engineering v. State of Bihar.⁵ In the said case, along with the company, two shareholders were parties to the writ petition challenging certain orders of the sales tax authorities. It was the shareholders' case that the corporate veil of the company should be lifted and the rights of shareholders of the corporation should be recognized under Article 19 of the Constitution. In this backdrop, the Supreme Court held that a company is a legal entity in its own right and accepting the shareholders' plea would mean that "what the corporations or the companies cannot achieve directly, can be achieved by them indirectly by relying upon the doctrine of lifting the veil."⁶ Therefore, the Court refused to permit individual shareholders to enforce their fundamental rights under Article 19 in the said facts.

As a consequence of the above decisions, shareholders of a company, despite being Indian citizens, were disentitled from challenging state actions against a company on the touchstone of Article 19. This led to an anomaly whereby citizens carrying on business in their individual capacity or as a partnership continued to be protected by Article 19(1)(g), but when the same business was carried out by a company, its shareholders would lose their rights under the said Article.

• C. Cooper and the Evolution of Law

Recognising the conflict arising out of the aforesaid judgment, the Supreme Court in Rustom Cavasjee Cooper v. Union of India⁷ (Bank Nationalisation case) permitted a shareholder-cum-director of a banking company to challenge the law nationalizing banks by way of a writ petition under Article 32. In this regard, the Supreme Court observed that "if the State action impairs the right of the shareholders as well as to the Company, the Court will not, concentrating merely upon the technical operation of the action, deny itself jurisdiction to grant relief."⁸ On merits, the Court held the impugned law to be violative of inter alia Article 19(1)(g) of the Constitution.

The aforementioned decision in R.C. Cooper paved the way for shareholders to file writ petitions for enforcing their freedoms under Article 19. The rationale accepted by the Supreme Court while permitting such actions by shareholders was that the state's adverse actions against a company would have the effect of necessarily reducing the value of a shareholder's investment in the company. In fact, in D.C. & G.M. v. Union of India,⁹ the Supreme Court while permitting shareholders to challenge a state action against a company held that the rights of shareholders and the company are rather co-extensive and "the denial to one of the fundamental freedom would be denial to the other."

Consequently, these judicial pronouncements have led to an established practice of filing of writ petitions by the shareholders to enforce their freedoms under Article 19, in cases where state action against the company in which they hold shareholding directly impacts them as well.

Employees'/Directors' right to maintain challenges under Article 19(1)(g)

Although the position as relating to enforcement of Article 19 freedoms by the shareholders of a company is now well established, a significant issue which requires consideration is in relation to the right of an employee/director to maintain a challenge under Article 19(1)(g), in cases of infringement of the legal rights of the company with which they are engaged. Despite the issue arising before the Supreme Court on numerable occasions, it has abstained from expressly extending the privilege available to shareholders to employees/directors of a company.

For instance, in the R.C. Cooper case, the petitioner was both a shareholder as well as a director of the concerned company. In this regard, the Supreme Court while recognizing that the right of the shareholder was protected under Art. 19(1)(g), did not go into the issue of maintainability of the petition by a director of the company.

Courts have not recognized a right of an employee/director to maintain a claim against State action targeted against a company in which they are engaged. The Supreme Court in Fertilizer Corporation Kamgar Union v. Union of India¹⁰, was seized of a challenge to the decision of the Fertilizer Corporation of India to sell certain assets of Sindri Fertilizer Factory. This writ petition was filed by a union of employees who contended that their right to occupation under Article 19(1)(g) had been violated due to sale of such assets. The Court rejected such contention holding that the right to pursue an occupation or calling is not the same as the right to work in a particular post under a contract. Even if the workers are retrenched, they could find alternative employment as industrial workers.

The absence of an authoritative ruling allowing employees/directors of companies to maintain a challenge against State action against a company in which they are engaged may impact their ability to protect their rights under Article 19(1)(g) of the Constitution. For instance, a company whose shareholders only consist of corporate entities may be unable to seek redress under Art. 19(1)(g), since none of its shareholders are 'Indian citizens'.

In order to overcome this shortcoming, it may be prudent to judicially recognize the standing of employees/directors of companies for maintaining challenges under Article 19, when such rights are impacted due to state actions against the company with which they are engaged. To understand the need and basis of granting such recognition to employees/directors, it is crucial to first highlight the factors which appeared to weigh upon the Supreme Court while extending the right to maintain challenges under Article 19 to shareholders of companies. Some of the factors taken into consideration were as follows:

1. That shareholders' rights are equally and necessarily affected if the rights of the company are affected.¹¹
2. That any adverse state action against the company affects the shareholder's right to carry on the business through the agency of the company.¹²
3. That any adverse state action against the company affects the shareholder's right to a divisible share in future of the property of the company.¹³

From a perusal of the above factors, it is manifest that the underlying consideration for granting standing to shareholders to maintain such challenges for the infringement of the legal rights of a company appears to be the direct correlation between the financial interests of the company and that of its shareholders.

As regards employees/directors, it is presumable that a similar privilege has not been extended, conceivably on the basis that employees/directors are merely entitled to their fixed emoluments, regardless the financial performance of the company. However, in today's day and age, the aforementioned notion may no longer be accurate. In this regard, it is relevant to note that the payment/salary/emolument structures being explored by entities for their employees/directors have substantially evolved, such that the financial performance of a company is directly linked to the emoluments payable to the company's employees/directors. Such payment structures being explored by companies include the following:

1. Employee Stock Option Plans ("ESOPs") and Sweat Equity Shares: Employee Stock Option means the "option given to the directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price."¹⁴ Similarly, sweat equity shares means "such equity shares as are issued by a company to its directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called."¹⁵ Relevantly, the purpose of ESOPs and sweat equity shares is to align the interests of a company with those of its employees/directors by giving such employees/directors a stake in the ownership of the company. As the price of the ESOPs and sweat equity shares is directly linked to the performance of the company, the financial interests of the holder of such ESOPs and sweat equity shares (employees/directors) is directly linked with the financial interests of the company.
   
   
2. Profit Sharing Programs: Profit sharing programs include various schemes/payment structures introduced by a company whereby a percentage of the company's profits are to be shared with its employees/directors. Such a program too directly links the performance of a company with the financial interests of its employees/directors.
   
   
3. Bonuses and Increments: In recent times, companies have introduced payment structures wherein the positive financial performance of a company may result in bonus payments being made out to a company's employees/directors. Similarly, the positive financial performance of a company may also result in substantial increments to the salaries payable to employees/directors. The same is reflective of the direct correlation between the positive financial performance of a company and the financial interests of its employees/directors.

Therefore, from a perusal of the above, it is evident that the financial interests of the employees/directors are now increasingly being interlinked with the financial interests of the company. Therefore, the test which the Supreme Court applied in order to afford shareholders of a company the right to maintain challenges under Art. 19(1)(g) for infringement of legal rights of a company stands equally satisfied for similar challenges by employees/directors of a company as well.

Even in terms of practical application, this would not pose any problem. The test to determine whether the employee/director can validly invoke his/her fundamental right may remain similar to that of a shareholder, i.e., whether the rights of the employee/director and the company are rather co-extensive and "the denial to one of the fundamental freedom would be denial to the other."

Relevantly the recent trend of decisions by Courts in India appear to be aligned with the above approach. Illustratively, the Supreme Court in Ajit Mohan & Ors. v. Legislative Assembly, National Capital Territory of Delhi,¹⁶ held as maintainable petitions filed by an employee in conjunction with the company, for protection of fundamental rights under Article 19. In the said case, Petitioner No. 1 – the Vice President and Managing Director of Facebook India, challenged the summons issued by the Peace and Harmony Committee of the Delhi Legislative Assembly, as violative of his fundamental rights under inter alia Article 19. In this regard, the Supreme Court was seized of a preliminary issue relating to the maintainability of the petition, since Petitioners 2 and 3 (companies) were not Indian citizens and no shareholder had been impleaded as a party. While considering the same, the Supreme Court dismissed this contention stating that "...if a shareholder can urge a right under Article 32 of the Constitution, we fail to appreciate why an officer of a corporation to the extent he has been asked to speak cannot urge this aspect."¹⁷ Admittedly, the Court's holding was influenced by the fact that the first summons was addressed particularly to Petitioner No. 1 (as opposed to the subsequent one which referred to the company). Nonetheless, the Court's observations in this regard indicate its proclivity to not deny standing to employees/office-bearers based on technicalities. While this is undoubtedly an encouraging trend, there is still a need for an authoritative ruling on this aspect to remove any ambiguity.

Conclusion

It is clear that over the course of time, the judicial position has been steadily shifting towards permitting challenges under Art. 19(1)(g) by natural persons associated with the company. In this regard, while it is settled that shareholders of a company can enforce their fundamental right to carry on business, the standing of employees/directors has not been conclusively established. As has been canvassed in the present article, the time is ripe for recognition of the standing of employees/directors for maintaining challenges under Art. 19(1)(g) in cases of state action against a company. Such recognition would better reflect the present commercial realities wherein the interests of employees/directors are increasingly aligned and co-extensive with that of their company, and thus, there remains little justification for restricting the right to maintain a challenge under Art. 19(1)(g) only to shareholders.

Footnotes

1. Writ Petition (Criminal) No. 113 of 2016

2. ILR (1955) Bom 680.

3. AIR (1951) Mad 979.

4. AIR 1963 SC 1811.

5. AIR 1965 SC 40.

6. id, at 28.

7. (1970) 1 SCC 248.

8. id, at 12.

9. AIR 1983 SC 937

10. (1981) 1 SCC 568

11. Bennett Coleman v. Union of India, AIR 1973 SC 106, [22].

12. Godhra Electricity Co. Ltd. v. State of Gujarat, (1975) 1 SCC 199 [28].

13. id, at 28.

14. Sec. 2(37), Companies Act 2013.

15. Sec. 2(88), Companies Act 2013.

16. Ajit Mohan v. Legislative Assembly, National Capital Territory of Delhi, 2021 SCC OnLine SC 456.

17. id, at 80.

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