A detailed study on the lifting of corporate veil in the era of 2020: Vanshika Modi

A DETAILED STUDY ON LIFTING OF CORPORATE VEIL: IN THE ERA OF 2020

Author: Vanshika Modi

ISSN: 2582-3655

ABSTRACT

This study is about what is lifting of corporate veil which includes how shareholders use the idea of limited liability to serve their personal motive which further leads us to determine how courts approved the concept which says separate legal entity of company can be ignored. Courts in different cases affirm various criteria under which corporate veil can be lifted.

English law has given many criteria which gives the legislation the idea of laying down various provisions in different enactments like company law, insolvency act and many more. further, it has come into notice that this concept is growing with time. Indian courts have considered new situations which can be used as new criteria for lifting the veil. courts are nowadays more liberal in applying the doctrine as people are finding new ways to do fraud with justice.

1. Introduction to corporate veil

As we all know there are different forms of business that an Indian citizen can pursue like a sole proprietorship, general or limited partnership, public or private company. Excluding company form of business, all other forms have unlimited liability to the debts of firms which implicates that if a sole proprietorship or partnership firm goes into debts the owner will have to pay from their own pockets which in the legal sense means that owner and business are the same entity.

The concept of corporate veil is the exact opposite of above because according to sec 7(3)[1] of companies act 2013, as soon as the company is registered and incorporated it became a separate legal entity and takes a position of an artificial person. The company’s money and property are for the company, not for shareholders. It is a friction is created by law which makes the company’s rights, powers, duty, different from shareholders’ rights, powers,  property. Therefore through this, a veil is created between two different legal personality companies and shareholders. This legal concept was recognized first time in English case Saloman vs Saloman[2] after which Indian judiciary also accepted this new interpretation, in this case, a shoe manufacturer forms a company with maximum share in his hand along with secured debentures after the one-year company goes into liquidation and creditors said that company and Saloman are one and same so he will not be entitled to debentures but the house of lords said:“…the company is a different person altogether from the subscribers of the memorandum, and though it may be that after incorporation the business is precisely the same as before, the same persons are managers, and the same hands receive the profits, the company is not, in law, their agent or trustee. 

Another well profound case is LEE vs LEE[3] in this case Mr Lee registered a company and after some time he met with an accident which leads to forming this case as his wife workmen compensation from the company but defendant refused to say that he is running the company as owner and he can not ask any compensation in the position of employee court rejected their contention and said as the company is a separate entity and Mr Lee act as an employee of a company, not the owner.

2. Concept of piercing the veil

Lifting or piercing the veil is just a metaphor that is used for ignoring the legal personality of the company. Usually, company and shareholders are two separate entities where the company is liable for its actions and not its member but under some special circumstances a legal decision where courts feel that members are using the company as a protective shield for their illegal actions, might Peirce/ lift the veil and treat the company and its members as one and the same thing.

In other words, it could be said that lifting the corporate veil means that disregarding the corporate personality and searching for real blunder makers who control the company so that justice could be done. The courts, therefore, lift the corporate veil by ignoring the company and directly approach its concerned members or managers. It is mostly at the discretion of the court and as other social, economical, and moral factors that determine the lifting.

Most of India’s company law provisions are borrowed from English common law. The Saloman’s case is a well-recognized doctrine under Indian company law. In case LIC VS Escort and others[4]. Supreme court said that it is firmly established ever since Saloman’s case that company is a separate legal entity but they clarify that corporate veil should be lifted when itself contemplating piercing or else in the situations of fraud or improper conduct.

However, the shareholders can not seek permission for lifting the veil. In case Premlata Bhatia vs UOI[5] it was very well held that a person can not eliminate the illegality by acknowledging that virtually a company and the person handling are one and the same person.

2.1Situations for which court can lift the veil

(a) To suspect the relationship between the holding company and binding company.

(b) To check the controlling power and shareholders of the company.

(C) To check the mismanagement and lawful operation of the company.

(d) To check whether the company is acting as an agent of shareholders.

3. Ground for lifting the veil

There are two inscriptions under which court can lift the corporate veil one is statutory provisions and the other is judicial interpretations.

3.1 statutory recognition for lifting the veil

Companies act 2013 has laid down various provisions in which court can lift the corporate veil, Which brings us down here to talk about them. Firstly the meaning of officer in default is important which according to sec 2(60) of companies act 2013[6] means that whenever an officer is at fault he would be made liable for his wrong by punishment or fine both. Therefore the act very well clarifies that the officer will be charged for his wrongs and not the company. Now let’s discuss the instances.

(1) FURNISHING WRONG FACTS OR SUPPRESSING MATERIAL FACT.

According to sec 7(7) [7] of companies act 2013 If courts find out that officeholders have presented incorrect facts or misrepresented the situation or suppress any material fact at the time of incorporation the shareholder’s liability will become unlimited.

(2) MISSTATEMENTS OF PROSPECTUS

Section34 and 35[8] set the criminal and civil liability respectively for the shareholders where it finds out that in any way the prospectus has misleading or untrue content which can misguide the subscriber it would make these shareholders criminally liable. While if the subscriber has incurred some losses he claims compensation also

(3) FILING REPORT TO REGISTRAR

According to section 121 of companies act, 2013[9] the conclusion of the annual general report is to be submitted within thirty days to the respective registrar and if not filed the default officers would be personally liable which altogether dismiss the concept of limited liability

(4) AT THE DISCRETION OF CENTRAL GOVERNMENT

According to section 216 of companies act 2013[10] if the central government feels that there is a need to investigate the members or owners of the company under any suspicion they can appoint inspectors and give powers to check up on the members. This section directly Peirce the veil by checking on those people who are wrongfully gaining in the name of the company and having powers to change the policy.

The companies act 2013, does not directly talk about piercing the veil but under various provisions like section 251 or 339 of companies act 2013[11], it very well gives the clear indication that shareholders will be liable unlimitedly for their wrong and section 447 of companies act 2013, is a residuary section which makes frauds liable.

3.2 Judicial interpretations

Lifting the corporate veil concept is not conclusive. With its characters giving reference to desirable values and non-conclusive, the corporate veil doctrine exhibits the open ending to standards to govern it. That is there are no concrete rules for justifying veil lifting. There are some issues discussed below which courts has acknowledged for piercing the veil

(1) when the company is a cloak or sham –

In case DDA vs Skipper construction[12], the skipper construction company purchased land from DDA but only pay only one installment and without paying the balance started constructions. When the sons of directors made liable they admitted that they were separated from their father and companies that they made had nothing to do with the properties concerned over here. But the court did not accept their contentions that there is no link between father and son and considered the transfer of ownership between sons and fathers as a hoax.

(2)  Formation of a subsidiary company which acts only as an agent of holding company

Justice Chinnappa Reddy In case State of UP vs Renusagar power co.[13] he said that there was a company called Hindalco who in the persuasion of development and expansion established a company called Renusagar. It was completely controlled by Hindalco. Renusagar at no point in time suggested any independent volition. So according to him state can any point of time lift the corporate veil and treat them as one concern as holding company would be liable for a subsidiary company.

(3)  Purpose of the company is to evade tax

In Re Sir Dinshaw Maneckjee petite[14], the assessee was a rich person who used to reap huge amounts of dividends. He registered four private companies the dividends and interests were received in the form of a feigned loan. Court held that the four companies have no business but were created with the sole purpose of avoiding tax and the company was nothing more than assess himself.

In case Juggilal vs CIT[15] the supreme court held that it is well recognized that income-tax authority has full-fledged power to pierce the corporate veil and peep inside the reality. The court has the authority when it feels that the incorporation of the company is for avoiding tax liability and can effortlessly neglect the legal personality.

(4) Where it is against the public policy

In case Connors bros vs Connors[16] there was a company in England that was defacto govern by inhabitants of Germans, who were in war with England at that time. This Alien company was not permitted to follow up their transactions as that would imply giving money to an enemy nation which is considered against the public policy. Under such circumstances, courts lift the veil to see who are people running the business.

(5) where corporate veil is been used for committing fraud.

 Case Jones vs Lipman[17] embodies a case in which a corporate veil is lifted when the company is used as a mere facade by concealing the facts. Mr Lipman came into a contract with a jones to sell a property but later he refused. Later to prevent contractual obligations, he transmitted it to a company that was made for this sole objective. Court pierce the veil and said the company is just a facade and should not be treated as a separate entity and Mr. Lipman should be made liable for contractual obligations.

(6) Avoiding welfare legislation

In case workmen of associate rubber industry vs associate rubber industry and another[18], the facts are such that a company is formed so that it can divide the profit which could increase the dividends and nonpayment of bonuses to workers. Courts out that the company came into existence with only motive to reduce the bonus of workers and in such a confrontation, the veil should be lifted.

4 Development of topic in this era

In the case state of UP vs Renusagar power co ltd[19] court said In this era of modern jurisprudence, the horizons of principals are enhancing. the parameters of lifting the corporate veil are not limited. It mostly depends upon real situations. The purpose of the legislation is to do justice for all parties. The ideology is that lifting of corporate veil is changing concept with its parameters expanding from time to time. The following are some cases that expanded the horizons.

  • Whether executing court can lift the corporate veil

In Bhatia Industries vs Asian Natural Resources[20] considered a new position where corporate veil can be lifted when the execution of a foreign arbitration award. What happened was a foreign company filed an execution proceeding in Bombay high court for breach of contract. The entity contended that though certain goods belonged to other companies of the judgment debtor, they are believed to be the part of the same group of companies. According to the entity, the company should be made liable in terms of the execution proceedings.

Court laid down the following instances under which court can lift the corporate veil in execution proceedings.

(1) When the court finds out that two separate entity works in partnership they are one single entity where one company acts as alter ego for others.

(2) when the court finds out that all the core activities of the subsidiary company are managed by holding company.

(3) when the court feels that company formed the group in an attempt to ignore recognition in the eye of ale.

(4) when the court finds out that both the company are so much interlinked that in no way it could be disentangled.

In this case, Bombay high court said that the corporate veil can be lifted under such circumstances that are discussed above. high court lifts the veil in this case but it is very significant to note that when the case was appealed to Supreme Court the particular question was left open for further interpretations.

Another case that considered this question was Mitsui OSK Lines vs Orient Ship agency [21]the Bombay High court was called to decide whether the executing court can at all lift the corporate veil by making parties liable to satisfy the decree in execution when the decree was not passed against them.

In the present case, the court differs from the Bhatia international case theory the court considered the case of Balwant rai[22] where the Supreme Court considered that doctrine should be applied in a restrictive manner. And declared that to rationalize the concept of lifting the corporate veil court must acquire two things control of the company by wrongdoers and impropriety.

It is to be considered that while disagreeing with the position laid down in Bhatia case this verdict also took  Supreme Court observation into consideration and left the question open-ended whether execution proceedings are available against the third party entities to lift the corporate veil. So still no conclusive answer has been come out whether corporate veil can be lifted in execution proceedings but after analyzing both the cases it has come to the notice that if there is a dire need of lifting the veil court can easily do that by looking at circumstances in execution proceedings.

  • Whether domestic arbitration has the power to pierce the corporate veil

Let’s start with the jurisprudence of this issue with the case  Balmer and Company vs Saraswathi Chemicals[23] which seems to be one of the foremost lines of judgment that clearly states that an arbitral tribunal has no power to lift the corporate veil with the reason that jurisdiction of these tribunal lies on the agreement within the parties. Any involvement of these non-signatory parties will lead to exceeding the power of jurisdiction.

Sudhir Gopi vs Indra Gandhi national open university[24] which also considered the issue of lifting the corporate veil by an arbitration tribunal in which Delhi high court held that arbitral tribunal is an element of limited jurisdiction which has no authority to expand the horizon of the proceeding’s to involve a person whose consent has not been taken. It was also said that the arbitration tribunal should not have the power to pierce the corporate veil. They must not bind any unconventional or non-signatory party.

In case Oil and Natural Gas Corporation vs Jindal Drilling and Industries[25] Bombay high court also accepted that that arbitral tribunal has no license to lift the corporate veil and the only court can lift the veil

In the recent case of 2018 IMC Ltd vs Board of trustees of Deendayal[26] court relied on the case A. Ayyasamy vs A Paramasivam which says that Arbitration act has nowhere laid down that any dispute is excluded from the purview of the arbitration tribunal. Courts on their discretion have put some disputes outside the purview of arbitration like disputes arising out of illegal arrangements or public nature criminal offences or competition laws or insolvency or corruption or fraud. Based on this conclusion the  Gujarat high court in the IMC case said that there is no provision in the law that prohibits an arbitrator from piercing the corporate veil only under some disputes which court had recognized non-arbitrable would be excluded.

It could be seen courts which considered these questions are all high courts so there is no concrete footing which says which is the right side. On the one hand Gujarat high courts talk about statutory provision never talks of excluding non-signatory members to be part of arbitration., the Delhi high court says that arbitration is exceeding its jurisdiction by lifting the corporate veil in the name of including non-signatory members to arbitration. Therefore the authority to lift the corporate veil should be fairly exercised or else the chastity will get eroded and the effect will be on the progress of the corporate sector.

Conclusion

The need for lifting corporate veil arises when shareholders were using the protective shield of limited liability as an instrument to protect their objective. It may occur in situations where there is an insufficiency of capital to pay third party creditors or where assets are so intertwined that the principle of good faith got affected.

From the evolution to the advancement it is very well recognized that the idea of lifting the corporate veil is not a rule of common principles it is an exception to a characteristic of a company limited liability. It must be applied with vigilance and only in those cases where situations are such that only lifting can give actual view to scam. Courts have nowadays embraced a liberal approach towards applying the principle by expanding its frontier by glancing at an increased rate of conflicts between companies and shareholders. Therefore it could be said in India any request to lift the corporate veil will rely on the circumstances of the case.

Courts have battled for many years to bring this refined form of lifting the corporate veil. Every new case brings a new set of facts that determine a different kind of challenge to courts. Different judges have different sets of opinions which some time turns out into expanding horizons of the concept or sometimes became a debatable topic. Finally, the verdict will depend upon several factors that court find necessary to lift the corporate veil.


[1]7.Incorporation of company.—(1) There shall be filed with the Registrar within whose jurisdiction the registered office of a company is proposed to be situated, the following documents and information for registration, name

(3) On and from the date mentioned in the certificate of incorporation issued under sub-section (2), the Registrar shall allot to the company a corporate identity number, which shall be a distinct identity for the company and which shall also be included in the certificate.

[2] Saloman vs A Saloman & Co Ltd [1896]UKHL1

[3] Lee v Lee’s Air Farming Ltd [1960] UKPC 33

[4] Life Insurance Corporation vs Escorts Ltd and Ors 1986 AIR 1370

[5] Premlata Bhatia v. Union of India (2004) 58 CL 217 (Delhi)

[6] officer who is in default‖, for the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise.

[7] Without prejudice to the provisions of sub-section (6), where a company has been got incorporated by furnishing any false or incorrect information or representation or by suppressing any material fact or information in any of the documents or declaration filed or made for incorporating such company or by any fraudulent action, the Tribunal may, on an application made to it, on being satisfied that the situation so warrants,—(a) pass such orders, as it may think fit, for regulation of the management of the company including changes, if any, in its memorandum and articles, in public interest or in the interest of the company and its members and creditors; or(b) direct that liability of the members shall be unlimited;

[8] Criminal liability for mis-statements in prospectus.— Where a prospectus, issued, circulated or distributed under this Chapter, includes any statement which is untrue or misleading in form or context in which it is included or where any inclusion or omission of any matter is likely to mislead, every person who authorizes the issue of such prospectus shall be liable under section 447:

35. Civil liability for mis-statements in prospectus.—(1) Where a person has subscribed for securities of a company acting on any statement included, or the inclusion or omission of any matter, in the prospectus which is misleading and has sustained any loss or damage as a consequence thereof, the company and every person who—(a) is a director of the company at the time of the issue of the prospectus;(b) has authorized himself to be named and is named in the prospectus as a director of the company, or has agreed to become such director, either immediately or after an interval of time

[9] 121. Report on annual general meeting.—(3) If the company fails to file the report under sub-section (2) before the expiry of the period specified under section 403 with additional fees, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees.

[10] Investigation of ownership of company.— (1) Where it appears to the Central Government that there is a reason so to do, it may appoint one or more inspectors to investigate and report on matters relating to the company, and its membership for the purpose of determining the true persons—

(a) who are or have been financially interested in the success or failure, whether real or apparent, of the company; or(b) who are or have been able to control or to materially influence the policy of the company

[11] Indian Companies Act, 2013

[12] Delhi Development Authority vs Skippers Constructions Company pvt. Ltd 1996 AIR 2005

[13] State Of UP And Ors vs Renusagar Power Co. And Others 1988 AIR 1737

[14] Re. Sir Dinshaw Maneckjee Petit, A.I.R. 1927 Bombay 371

[15] Juggilal Kamlapat vs Commissioner Of Income Tax 1970 AIR 529

[16] Connors Bros. v. Connors (1940) 4 All E.R. 179

[17] Jones v. Lipman, (1962) I. W.L.R. 832

[18] The Workmen Employed in Associated Rubber Industries Limited, Bhavnagar v. The Associated Rubber Industries Ltd., Bhavnagar and another, A.I.R. 1986 SC 1

[19] State of UP and Ors vs Renusagar Power Co Ltd and Others 1988 AIR 1737

[20] Bhatia Industries and Infrastructure Ltd vs Asian Natural Resources and Anr. 2016 (6)ABR132

[21] Mitsui OSK Lines Ltd vs Orient Ship Agency Pvt Ltd and Ors 2020 SCC OnLine Bom217

[22] Balwant Rai Saluja and Ors vs AIR India Ltd and Ors (2014)9 SCC 407

[23] Balmer Lawrie and Company Ltd vs Sarawathi Chemicals Proprietors Saraswathi Leather Chemicals (p) Ltd, 239 (2017) DLT 217

[24] Sudhir Gopi vs Indra Gandhi National Open University 2017 SCC OnLine Del 8345

[25] Oil and Natural Gas Corporation Ltd vs Jindal Drilling and Industries Ltd , 2015 SCC OnLine Bom1707

[26] IMC Ltd vs Board of Trustees of Deendayal Ort Trust and Ors2019 3GLR1798

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