Principles of lifting of corporate veil
The clear prescription in law is
that a company is a separate juristic entity, though, it can sue or be sued
through a natural person. A board of Directors’ shall be responsible for
management of the company, though, the board of Directors of a company limited
by shares shall have limited liability. Therefore, so far as the personal
liability of Directors’ are concerned, there shall be clear fetter attached to
that and unless, a Director of the company undertakes a personal liability, he
cannot be sued in his personal capacity. No doubt this is a pith and substance
of the matter. As regards the issue of oppression and management, role and
responsibilities of Directors’ in
matters related to Companies Act 2013 are concerned, the same are well defined
and per se there are no ambiguity.
However, in civil suits, liability by a Director is negated by a sheer
camouflage. In ordinary course of litigation, it is often observed, that, if a
judgment and decree against a company is passed, the Director or Directors
around that time i.e when the judgment and decree are passed, resigns from the
board of the company to extricate itself from liability in execution of the
judgment and decree. We know, that a closely held company take recourse to all
such measures to defeat a plaintiff /decree holder from reaping the fruit of a
judgment and decree by claiming that at the relevant time i.e when a judgment
and decree was passed, Mr “X” was not a
Director. I may hasten to add that in a criminal case, such as bouncing of
cheques, or such other offences under the provisions of Companies Act 2013, the
relevant time to sue shall be when cause of action arises i.e when cheques are
dishonoured and therefore, even if a Director resigns subsequently, the same
shall not absolve him from the liability, however, in execution of a decree in
civil courts, such Director or Directors from a closely held company takes
refuge that he is no longer a Director and therefore, he will not be personally
liable to a judgment and decree passed against the company, he once was a
Director. The manipulation in management in a closely held company is crafted
in this manner and such Director or Directors’ takes refuge in a “principles of Corporate veil”. Whether
such recourse shall be readily available to such a Director or there are
circumstances when “lifting of corporate
veil” could be permitted shall be delineated herein. Further, what shall be
the impact of lifting of corporate veil on a Director, who, hitherto claimed
that he no longer owed any liability towards a judgment and decree in view of
his subsequent resignation that may have been passed against the company. The
moot point is can a Director be allowed to frustrate a decree on the premise of
his resignation at the time of pronouncement of judgment and decree and
further, whether principles of corporate
veil shall come to his rescue?
Though, the issue of lifting of corporate veil has often been
deliberated and it is also true that as law has evolved, the courts have veered
around the view that corporate veil is not an absolute concept and the same
could be lifted, if deemed appropriate for just decision of a case and if
circumstances warrants lifting of corporate veil. However, a comprehensive
analysis awaited the issues which appears to have culminated in a recent
judgment rendered by hon’ble Delhi High Court in a matter captioned as Delhi
Airport Metro Express Pvt Ltd Vs Delhi Metro Rail Corporation Ltd OMP
(ENF) (Comm) 145/2021.
To put in perspective, it may be
apt to advert to the very genesis of the principles of “Lifting of Corporate Veil”.
The UK Supreme Court in a matter
reported as Prest Vs Prest & Ors (2013) UKSC has held as under:
“[34] These considerations reflect the
broader principle that the corporate veil may be pierced only to prevent the
abuse of corporate legal personality. It may be an abuse of the separate legal
personality of a company to use it to evade the law or to frustrate its
enforcement. It is not an abuse to cause a legal liability to be incurred by
the company in the first place. It is not an abuse to rely upon the fact (if it
is a fact) that a liability is not the controller's because it is the
company's”.
The Supreme Court of India in a
matter reported as Balwant Rai Saluja & Anr. vs. AIR India Limited &
Ors (2014) 9 SCC 407 has explained the doctrine in the following terms:-
70. The
doctrine of “piercing the corporate veil” stands as an exception to the
principle that a company is a legal entity separate and distinct from its
shareholders with its own legal rights and obligations. It seeks to disregard
the separate personality of the company. The starting point of this doctrine
was discussed in the celebrated case of Salomon
v. Salomon & Co. Ltd. [1897
AC 22 the law has been crystallised
around the six principles
formulated by Munby, J. in Ben Hashem v. Ali Shayif [Ben Hashem v.
Ali Shayif, 2008 EWHC 2380
(Fam)] . The six principles, as found at paras 159-64 of the case are as
follows:
(i)
Ownership and control of a company were not enough
to justify piercing the corporate veil;
(ii)
The court cannot pierce the corporate veil, even
in the absence of third-party interests in the company, merely because it is
thought to be necessary in the interests of justice;
(iii)
The corporate veil can be pierced only if there is
some impropriety;
(iv)
The impropriety in question must be linked to the
use of the company structure to avoid or conceal liability;
(v)
To justify piercing the corporate veil, there must
be both control of the company by the wrongdoer(s) and impropriety, that is use
or misuse of the company by them as a device or facade to conceal their
wrongdoing; and
(vi)
The company
may be a “façade” even though it was not originally incorporated with any
deceptive intent, provided that it is being used for the purpose of deception
at the time of the relevant transactions. The court would, however, pierce the
corporate veil only so far as it was necessary in order to provide a remedy for
the particular wrong which those controlling the company had done.
INDIAN POSITION
The position of law regarding
this principle in India has been enumerated in various decisions. A
Constitution Bench of the Supreme Court in LIC
v. Escorts Ltd. [(1986) 1 SCC 264] , while discussing the
doctrine of corporate veil, held that :
“90. … Generally and broadly speaking,
we may say that the corporate veil may be lifted where a statute itself
contemplates lifting the veil, or fraud or improper conduct is intended to be
prevented, or a taxing statute or a beneficent statute is sought to be evaded
or where associated companies are inextricably connected as to be, in reality,
part of one concern. It is neither necessary nor desirable to enumerate the
classes of cases where lifting the veil is permissible, since that must
necessarily depend on the relevant statutory or other provisions, the object
sought to be achieved, the impugned conduct, the involvement of the element of
the public interest, the effect on parties who may be affected, etc.”
Thus, on relying upon the
aforesaid decisions, the doctrine of piercing the veil allows the court to
disregard the separate legal personality of a company and impose liability upon
the persons exercising real control over the said company. However, this
principle has been and should be applied in a restrictive manner, that is, only
in scenarios wherein it is evident that the company was a mere camouflage or
sham deliberately created by the persons exercising control over the said
company for the purpose of avoiding liability. The intent of piercing the veil
must be such that would seek to remedy a wrong done by the persons controlling
the company. The application would thus depend upon the peculiar facts and
circumstances of each case.”
In Balmer Lawrie & Co. Ltd. vs. Saraswathi Chemicals Proprietors Saraswathi Leather Chemicals (P) Ltd 2017 SCC OnLine Del 7519 it is held as under:
14. Though a
Court can lift the corporate veil, the same can be done only in extraordinary
circumstances and by due adjudicatory process. It is trite law that an
executing Court cannot go behind the decree; it must be enforced as it is.
Thus, it is not open for a petitioner to claim that although the decree is
against one entity it must be enforced against another. However, there may be
cases where it is found that the assets of the judgment debtor have been
secreted, siphoned off, or by a fraudulent device ostensibly placed outside the
control of the judgment debtor, in an endeavour to frustrate the enforcement of
the decree. In such cases, the Court is not powerless to extend its reach to
third parties to enforce the decree; however this is limited for recovering the
assets of the judgment debtor. In the event a corporate facade is used to
perpetuate such fraud, the corporate veil may be lifted”.
In
para 89 of
Delhi Airport Metro Express (Supra) the Delhi High Court has
held as under:
“89. On a review of the legal position as it
prevails today across various jurisdictions, it is manifest that the doctrine
of lifting of the corporate veil is no longer recognized to be applicable only
in the context of the facade and sham tests that have held the field for
centuries. The said principle may also in an appropriate case be liable to be
resorted to where equity and the ends of justice may sanction such a recourse,
where legal obligations are sought to be avoided as also in a setting where
public policy or public interest so demand and require. A decree or judgment of
a competent court must necessarily be enforced. Courts of justice would be
failing in their duty if a decree were left to be a mere dead letter. If
decrees and judgments of courts were to be rendered inexecutable and courts
were to simply be forced to stand on the sideline, it would clearly shake the
confidence of the people in the legal system and its very efficacy. An
obligation which flows from a decree or an award must not only be duly
recognized but also enforced in accordance with law. Taking any other view
would render the entire adjudicatory process meaningless and an exercise in
futility”.
WHETHER
EXECUTING COURT CAN LIFT CORPORATE VEIL
The hon’ble Delhi Hig Court in a matter reported
as Delhi Airport Metro Express (Supra) has
comprehensively dealt with the issue of lifting of corporate veil and the
efficacy and limitation of the doctrine in the modern world. The recitation of
the hon’ble Delhi High Court is worth reproducing:
89. On a
review of the legal position as it prevails today across various jurisdictions,
it is manifest that the doctrine of lifting of the corporate veil is no longer
recognized to be applicable only in the context of the facade and sham tests
that have held the field for centuries. The said principle may also in an
appropriate case be liable to be resorted to where equity and the ends of
justice may sanction such a recourse, where legal obligations are sought to be
avoided as also in a setting where public policy or public interest so demand
and require. A decree or judgment of a competent court must necessarily be
enforced. Courts of justice would be failing in their duty if a decree were
left to be a mere dead letter. If decrees and judgments of courts were to be
rendered inexecutable and courts were to simply be forced to stand on the
sideline, it would clearly shake the confidence of the people in the legal
system and its very efficacy. An obligation which flows from a decree or an
award must not only be duly recognized but also enforced in accordance with
law. Taking any other view would render the entire adjudicatory process
meaningless and an exercise in futility”.
94. As modern
commerce and the regulatory regime in respect thereof has evolved over the
decades, courts have leaned towards jettisoning a rigidity of approach or being
tied down by principles which may have lost relevancy. Law in any case must
grow and evolve bearing in mind the felt societal needs of the time and at the
same time taking into consideration technological and social changes. It must
keep abreast with the march of civilization itself. Commerce today straddles
borders and boundaries of regions and countries. That has indubitably thrown up
its own share of original and novel questions. These transformational and
normative changes warrant this Court to observe that the evolution of the laws
cannot be tied down to conventional creeds. The web of complex corporate
structures and which many a time spread across jurisdictions commands the
courts to develop and adapt. On a more foundational ground, this Court deems it
appropriate to recall the famous words of Cardozo and Hand both of whom had
commended for acceptance the basic principle that a corporate structure should
not frustrate the enforcement of an obligation or leave a party remediless.
Courts should desist from becoming a mere mute spectator”.
Similarly, again in para no.102
of the aforesaid case, hon’ble Delhi
High Court has clearly held that corporate veil can certainly be lifted. The
finding of the hon’ble Delhi High Court is illustrated as under:
102. Before closing, it would appear appropriate to deal with the
submission based on the provisions of the Code. The submission essentially was
that the executing court cannot go behind the decree. According to learned
senior counsel, since GNCTD had not been made a party to the arbitral
proceedings, it could not at this stage of the execution proceedings be joined
or held liable. The Court finds itself unable to sustain this submission for
the following reasons. It must at the outset be noted that GNCTD has been joined
in these proceedings consequent to the Court having pierced the veil. Such a
course cannot possibly be construed as going beyond or behind the decree. The
Court in these proceedings is essentially concerned with execution of the
decree. For that purpose, it has for reasons aforenoted, come to the conclusion
that the veil of corporate personality is liable to be lifted. It is in the
aforesaid backdrop that GNCTD has been joined in these proceedings. The
submission noted above is thus rejected”.
CONCLUSION
Therefore what clearly
emanates from the foregoing discussions based on the judicial precedents is
that the principles of lifting of corporate veil is not a norm, but an
exception. The law has however evolved vastly over the years and corporate veil
is no longer regarded as sacrosanct and courts are now clothed with adequate
power in dealing with the delinquent, who acts in camouflage with a view to
reap wrongful gains and take shelter to the principles of corporate veil to
inflict losses on others and manipulate the inevitable. The concept is no
longer absolute as illustrated above and when lifting of corporate veil appears
to be just with a view to unravel truth and to unfold manipulation, siphoning
of funds and deceit, the corporate veil can be lifted and the six (6) principles
provides the clear periphery to the situation when corporate veils can be
pierced or lifted.
Anil K Khaware
Founder & Senior
Associate
Societylawandjustice.com
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