PRINCIPLES OF LIFTING OF CORPORATE VEIL

 

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