INTRODUCTION :
The concept of a company’s character and legal identity being separate and independent from its members and shareholders, and having its own set of legal rights and obligations, was propounded in the celebrated English case of Saloman v Saloman Co. Ltd.(hereinafter refer as ‘Salomon case’), it was deduced that ‘company is a separate legal entity’, having an identity of its own, which is independent and distinct form its members and shareholders. This is a well-settled principle recognized by many common as well as civil law countries around the globe. The case also states that once a company is incorporated, it becomes an ‘artificial person’ and must be treated separately from its members. The company enjoys certain rights and obligations of its own, and has the power to sue or be sued. This ‘corporate personality’ rule also gives the companies an advantage of perpetual succession.
According to the principle of perpetual succession, a company is considered to be solely dependent on itself and survives longer than any of its members, i.e. “members may come and members may go, but the company stays on until it’s winded up by due process of law.” It can be stated that there exists a ‘veil’ that separates the company and its members. Often the members of the company misuse this corporate veil to commit fraudulent activities and to protect themselves from any legal proceedings that is initiated against them for any mischief done. In such cases, courts disregard the corporate personality of the corporate body and pierce through the veil to find out the actual perpetrators, and initiate legal actions against them.
.Since corporate personality forms the fundamental of a company, courts are often faced with a dilemma when it comes to lifting the veil, as misapplication of this rule may harm the business prospects of the company and give suboptimal outcomes. In this paper, the authors seek to analyse the position of the rule under Indian Law, and discuss the statutory provisions of the Companies Act 2013 (hereinafter refer as “The Act”), which relate to lifting of corporate veil. Further, certain judicial pronouncements have been discussed in this paper, which determine different cases under which the veil can be lifted by the courts.
REASONS LED TO LIFTING THE VEIL :
An artificial person is not capable of doing anything illegal or fraudulent, the façade of corporate personality might have to be removed to identify the persons who are really guilty. This is known as ‘lifting of corporate veil . This principle of “lifting the corporate veil” by the courts, can be regarded as an ‘exception’ to the corporate personality rule of corporate law .
The principle of separate legal identity of a company originated after the landmark Saloman case ,where it was decided that in “questions of property and capacity, of acts done and rights acquired or, liabilities assumed thereby… the personalities of the natural persons who are the company’s corporators is to be ignored.”
A similar approach has been adopted by the Supreme Court and in some cases has been seen through the corporate veil. Thus, in “Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly”, the Apex Court, while considering whether the appellant was a state agency or instrumentality under “Article 12 of the Indian Constitution”, observed inter-alia: “For the purpose of Article 12, one must necessarily see through the corporate veil to ascertain whether behind that veil is the face of an instrumentality or agency of the State.”
“Again, in State of Uttar Pradesh. v. Renusagar Power Company, the Supreme Court observed”: “The veil of corporate personality even though not lifted sometimes, is becoming more and more transparent in modern company jurisprudence.”
In the case “Lee v. Lee’s Air Farming Ltd” Lee the owner has incorporated a company in “Lee’s Air Farming Ltd”, of which he was the managing director. As such he appointed himself as the company’s pilot. He was killed whilst at the firm’s company in a flying crash. Under the Workers’ Compensation Act, his widow received insurance. “In effect, the magic of corporate personality enabled him of directors and shareholders consent to the misuse of the company’s money, they can be prosecuted for the theft because the consent of the whole number may not be the consent of the company”
In the landmark judgement “L.I.C India v Escorts Ltd. & Others” (Hereinafter refer as ‘LIC Case’),the Hon’ble Supreme Court of India not only upheld the principles espoused in the Saloman case, but has also provided certain exceptions in which the rule of corporate personality of a company can be ignored by the adjudicating authority, and the real perpetrator can be recognized and penalized. Since the company and its members are separate entities , it is presumed that “there exists a veil between the company and its members”. This veil is often misused by the members of the company to commit mischief or other fraudulent activities, and to protect themselves from any legal actions. In such circumstances, the court is left with no option but to lift the corporate veil, in-order to recognize the real member at fault. Once the veil is lifted by the court and the real perpetrator is found, the accused can then be tried for his fraudulent activity or mischief, as per due procedure established by the law.
The advantage of being recognized as a separate legal entity can only be retained by any company if there is no fraudulent activity being conducted, or the company is real and not a sham or an agency. In the landmark judgment of Littlewoods Mail Order Stores Ltd. v. IRC5 , it was opined that only an incorporation of a company doesn’t cast a complete veil over the corporate personality of the company which is limited by shares. A court can always pierce this veil and look behind the mask to find out the actual perpetrator who is hiding behind the veil. It was thus held in the case that a generally a company will be regarded as separate legal entity, however when this privilege of legal entity is used to defeat the purpose of the same, then for the interest of public at large, the notion of legal entity will be disregarded by the courts, and the company will be treated as association of members. In United States v. Milwaukee Refrigeration Transit Company, the court opined that: “A corporation will be looked upon as a legal entity as a general rule but when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime the law will regard the corporation as an association of persons.”
The doctrine of piercing the corporate veil is an exception to the general principle of corporate personality. The two primary reasons for existence of such exceptions are that, firstly, corporations cannot be always treated as separate legal person or an independent entity because they are an artificial person, hence incapable of committing any crime or tort as committing the same requires mens rea. So courts have to disregard the principle of corporate personality to determine the real intentions of the members and directors of the company. Secondly, if the rule of separate legal personality is applied strictly and unhindered, then it is obvious that the interested members can always “hide” behind the veil of limited liability.
CIRCUMSTANCES UNDER WHICH THE CORPORATE VEIL CAN BE LIFTED :
There are two circumstances under which the Corporate Veil can be lifted. They are:
1: Statutory Provisions
2: Judicial Interpretations
Statutory Provisions :
Section 5 of the Companies Act, 2013 –
This particular section characterizes the distinctive individual engaged in a wrongdoing or a conduct which is held to be wrong in practice, to be held at risk in regard to offenses as ‘official who is in default’. This section gives a rundown of officials who will be at risk to discipline or punishment under the articulation ‘official who is in default’ which includes within itself, an overseeing executive or an entire time chief.
Section 45 of the Companies Act, 2013 –
Reduction of membership beneath statutory limit: This section lays down that if the individual count from an organization is found to be under seven on account of a public organization and under two on account of a private organization (given in Section 12) and the organization keeps on carrying on the business for over half a year, while the number is so diminished, each individual who knows this reality and is an individual from the organization is severally at risk for the obligations of the organization contracted during that time.
Madan lal v. Himatlal & Co. –
In this case, the respondent documented a suit against a private limited company and its directors because he had to recover his dues. The directors opposed the suit on the ground that at no time did the company carried on business with individual count which was to go below the statutory minimum and in this manner, the directors couldn’t be made severely at risk for the obligation being referred to. It was held that it was for the respondent being dominus litus, to choose the people himself who he wanted to sue.
Section 147 of the Companies Act, 2013 –
Misdescription of name: Under sub-section (4) of this section, an official of an organization who signs any bill of trade, hundi, promissory note, check wherein the name of the organization isn’t referenced in the way that it should be according to statutory rules, such official can be held liable on the personal level to the holder of the bill of trade, hundi and so forth except if it is properly paid by the organization. Such case was seen on account of Hendon v. Adelman.
Section 239 of the Companies Act, 2013 –
Power of inspector to explore affairs of another company in the same gathering : It gives that in the event that it is important for the completion of the task of an inspector instructed to research the affairs of the company for the supposed wrong-doing, or a strategy which is to defraud its individuals, he may examine into the affairs of another related company in a similar group.
Section 275 of the Companies Act, 2013 –
Subject to the provision of Section 278, this section provides that no individual can be a director of in excess of 15 companies at any given moment. Section 279 furnishes for a discipline with fine which may reach out to Rs. 50,000 in regard of every one of those companies after the initial twenty.
Section 299 of the Companies Act, 2013 –
This Section emphasises and offers weightage to the existing proposal of the Company Law Committee: “It is important to see that the general notice which a director is bound to provide for the company of his interest for a specific company or firm under the stipulation to sub-section (1) of Section 91 which is ought to be given at a gathering of the directors or find a way to verify that it is raised and read at the following gathering of the Board after it is given. The section not only applies to public companies but also applies to private companies. Inability to consent and act in consonance to the necessities of this Section will cause termination the Director and will likewise expose him to punishment under sub-section (4).
Section 307 & 308 of the Companies Act, 2013 –
Section 307 applies to each director and each regarded director. The register of the shareholders should contain in it, not just the name but also how much shareholding, the description of shareholding and the nature and extent of the right of the shareholder over the shares or debentures.
Section 314 of the Companies Act, 2013 –
The object of this section is to restrict a director and anybody associated with him, holding any business which provides compensation if the company supports it.
Section 542 of the Companies Act, 2013 –
Pretentious Conduct: If over the span of the winding up of the company, it gives the idea that any business of the company has been continued with goal to defraud the creditors of the company or some other individual or for any deceitful reason, the people who were intentionally aware of this and still agreed to the carrying on of the business, in the way previously mentioned, will be liable on a personal level without incurring the liabilities of the company, and will be liable in a manner as the court may direct.
In Popular Bank Ltd, it was held that the Section 542 seems to leave the Court with attentiveness to make an assertion of risk, in connection to ‘all or any of the obligations or liabilities of the company’.
JUDICIAL INTERPRETATIONS :
By contrast with the limited and careful statutory directions to ‘lift the veil’ judicial inroads into the principle of separate personality are more numerous. Besides statutory provisions for lifting the corporate veil, courts also do lift the corporate veil to see the real state of affairs. Some cases where the courts did lift the veil are as follows:
United States v. Milwaukee Refrigerator Transit Company –
In this case, the U.S. Supreme Court held that “where the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the law will disregard the corporate entity and treat it as an association of persons.”
Some of the earliest instances where the English and Indian Courts disregarded the principle established in Salomon’s case are:
Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd –
This is an instance of determination of the enemy character of a company. In this case, there was a German company. It set up a subsidiary company in Britain and entered into a contract with Continental Tyre and Rubber Co. (Great Britain) Ltd. for the supply of tyres. During the time of war, the British company refused to pay as trading with an alien company is prohibited during that time. To find out whether the company was a German or a British company, the Court lifted the veil and found out that since the decision making bodies, the board of directors and the general body of share holders were controlled by Germans, the company was a German company and not a British company and hence it was an enemy company.
Gilford Motor Co. v. Horne –
This is an instance for prevention of façade or sham. In this case, an employee entered into an agreement that after his employment is terminated he shall not enter into a competing business or he should not solicit their customers by setting up his own business. After the defendant’s service was terminated, he set up a company of the same business.
His wife and another employee were the main share holders and the directors of the company. Although it was in their name, he was the main controller of the business and the business solicited customers of the previous company. The Court held that the formation of the new company was a mere cloak or sham to enable him to breach the agreement with the plaintiff.
Re, FG (Films) Ltd –
In this case the court refused to compel the board of film censors to register a film as an English film, which was in fact produced by a powerful American film company in the name of a company registered in England in order to avoid certain technical difficulties. The English company was created with a nominal capital of 100 pounds only, consisting of 100 shares of which 90 were held by the American president of the company. The Court held that the real producer was the American company and that it would be a sham to hold that the American company and American president were merely agents of the English company for producing the film.
Jones v. Lipman –
In this case, the seller of a piece of land sought to evade the specific performance of a contract for the sale of the land by conveying the land to a company which he formed for the purpose and thus he attempted to avoid completing the sale of his house to the plaintiff. Russel J. describing the company as a “devise and a sham, a mask which he holds before his face and attempt to avoid recognition by the eye of equity” and ordered both the defendant and his company specifically to perform the contract with the plaintiff.
Tata Engineering and Locomotive Co. Ltd. State of Bihar –
In this case, it was stated that a company is also not allowed to lay claim on fundamental rights on the basis of its being an aggregation of citizens. Once a company is formed, its business is the business of an incorporated body thus formed and not of the citizens and the rights of such body must be judged on that footing and cannot be judged on the assumption that they are the rights attributable to the business of the individual citizens.
N.B. Finance Ltd. v. Shital Prasad Jain –
In this case the Delhi High Court granted to the plaintiff company an order of interim injunction restraining defendant companies from alienating the properties of their ownership on the ground that the defendant companies were merely nominees of the defendant who had fraudulently used the money borrowed from the plaintiff company and bought properties in the name of defendant companies. The court did not in this case grant protection under the doctrine of the corporate veil.
Shri Ambica Mills Ltd. v. State of Gujarat –
It was held that the petitioners were as good as parties to the proceedings, though their names were not expressly mentioned as persons filing the petitions on behalf of the company. The managing directors in their individual capacities may not be parties to such proceedings but in the official capacity as managing directors and as officers of the company, they could certainly be said to represent the company in such proceedings. Also as they were required to so act as seen from the various provisions of the Act and the Rules they could not be said to be total strangers to the company petition.
In all the aforementioned circumstances, the courts have used their judicial discretionary powersand have pierced through the veil to find out the actual intent and existence of the companies
LIFTING OF CORPORATE VEIL FOR ADVANTAGE OF A COMPANY :
The Hon’ble Supreme Court has also lifted the corporate veil for advantage of companies. One such case depicting the same is UP v. Renusagar Power Company. Brushing through the facts of the case it can be seen that the Uttar Pradesh Electricity Duty Act, had a provision which stated that if a company uses the electricity generated by its own source of energy, it can avail the benefit of reduced rate of duty on the electricity which was generated. Hindalco ltd. was using the electricity of Renusagar Limited which was its wholly owned subsidiary, the Hon’ble Supreme Court ruled in favour of Hindalco limited and lifted the corporate veil to establish the fact that, both the companies, Hindalco Ltd. And Renusagar Ltd. were inextricably linked and can be considered to be the same. This helped Hindalco limited to avail the benefit under the Uttar Pradesh Electricity Duty Act. This was one of the numerous cases where the apex court used the principle of lifting of corporate veil for the benefit of the company.
Indian courts have always emphasized the concept of company’s having a separate identity to its shareholders and board of directors. They do not lift the corporate veil until and unless it is absolutely necessary, as observed in the case of Vodafone International Holdings B.V. v. Union of India & Another. Briefly stating the facts of the case Vodafone, a company which was incorporated in the Netherlands acquired CGP investments (a company from Cayman Islands) which was controlled by, Hutchinson a company of Hong-Kong. CGP investments held 67% shares in Hutchinson-Essar Ltd., which was Hutchinson’s Indian mobile business company. The Indian income tax authorities contended that, since capital gains were made by Hutchinson in India, therefore they stated that Vodafone was withholding tax and it should pay a sum of 110 Billion rupees. Bombay HC ruled in favor of the Income tax authorities which went to appeal in the apex court. Where the decision of the SC was very pro-business, it clearly demarcated the lifting of corporate veil, when there are cross border transactions and tax issues.
CONCLUSION:
Based upon the analysis it can be concluded that the courts have exercised a very broad discretion to decide whether or not to pierce the curtain and to make the participants accountable for a specific case. Bearing in mind it has led to uncertainty and lack of predictability that the primary objective of corporate law should be clarity and predictability concerning regulatory criteria to raise the veil. The judges will use whichever theory they use, or sometimes occasionally concoct their hypothesis to fasten the blame for reasonable purposes. The rule of lifting the veil in India is undoubtedly too broad and the courts have wide discretion as to whether to lift the veil or not. The rulings regarding the lifting of corporate veil can neither be too lenient nor too stringent, as the extremes in both the cases can be detrimental for the general public, hence courts have to tread carefully in this area of law. Though the principle is still an evolving law in many jurisprudences, it has yet proved to be a great watchdog for the companies. However, the principle should not be applied consistently but only in rare case. Even the companies have the right to life and freedom as provided under Article 21 of the constitution. The Courts must resist the temptation for lifting the veil as a swift resort. As rightly pointed out by the Apex Court in the Balwant Rai Saluja & Anr. v. Air India Ltd. & Anr., case, the corporate personality identity must be respected by the courts and the principle must be applied in a restrictive manner, only in cases where it is very much evident that the company is a sham or a camouflage to evade liabilities by the company owners.
Reference :
http://www.legalservicesindia.com/article/2335/Principle-of-Lifting-the-Corporate-Veil.html
https://www.lawteacher.net/free-law-essays/business-law/article-on-lifting-of-the-law-essays.php
https://lawescort.in/2020/05/development-of-the-lifting-of-the-corporate-veil-doctrine-in-india/
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