Lifting the Corporate Veil: The English and Indian Laws



Radhika Seelam

A Comparative Approach

INTRODUCTION:

Law recognizes a corporation as a separate legal entity. Since Salomon decision in 1897, the courts have often been called upon to apply the principle of separate legal personality. In some cases, the principle was upheld and in some others it was not. For centuries, there was a heated controversy over the applicability of the doctrine of separate legal entity and further to limit the theory of limited liability which is often metaphorically termed as “lifting the corporate veil”. It is defined by BLACK’S LAW DICTIONARY 1168 (7th ed. 1999) as “piercing the corporate veil: [t]he judicial act of imposing liability on otherwise immune corporate officers, directors, and shareholders for the corporation’s wrongful acts.”

The term “piercing the corporate veil” became well known after Maurice Wormser, a law professor at Fordham University, wrote his key article on the subject. (See Maurice Wormser, Piercing the Veil of Corporate Entity, 12 COLUMN. L. REV.496 (1912)).

THE ENGLISH DOCTRINE: A BRIEF HISTORY

The history of English Doctrine can be divided into three stages.

a) 1897-1966: This period may be called as the classical veil lifting or the early experimentation period., during which the English courts experimented with different approaches of the doctrine. The House of Lords decision in Salomon’s case dominated in this period.

b) 1966-1989: This period started after the second world war and this is the interventionist period. The rules of House of Lords in Salomon’s case were changed and the veil lifting was encouraged during this period. In Littlewoods mail stores v. IRC(1969) , Lord Denning stated :- “ the doctrine laid down in Salomon’s case has to be watched very carefully. It has often been supposed to cast a veil over the personality of a limited company through which the courts cannot see. But that is not true. The courts can, and often do, pull off the mask”. With of wanting of any hypothesis, the spirit of the doctrine in this period can be attributed to the most influential jurist of the twentieth century, Lord Denning.

c) 1989-the present: Much of the credit can be given to the Woolfson’s case at the beginning of this period. The doctrine of corporate veil lifting began to be disfavored by the courts in this period. Lord Keith in Woolfson v. Strathclyde Regional Council, stated that the one situation where a corporate veil could be lifted was whether there are special circumstances indicating that the company is a ‘mere façade concealing the true facts’.

After the high profile cases in 1990s which were decided against the doctrine of corporate veil lifting, it can be said that the veil lifting has become rare under the English Law. The judgment of the Court of Appeal in Adams v. Cape Industries Plc(1990) leaves only three circumstances when a corporate veil can be lifted. 1)If the court is interpreting a statute or document and the statute itself is ambiguous, which would allow the court to treat a group as a single entity. 2) If special circumstance indicate that it is a mere façade concealing the true facts, the courts may lift the veil. 3) The third exception is an application of the agency principle. Parent companies and subsidiaries are unlikely to have express agency agreements and it is even difficult to prove an implied agency. Evidence is required that day to day control was being exercised by the parent company over its subsidiaries.

One of the reactions of the Parliament to Salomon’s decision was that an offence of Fraudulent trading was introduced. This offence was continued in the Companies Act 1948 which contained both civil and criminal sanctions. Now criminal offence is contained section 993 of the Companies Act 2006 while the civil sanctions are contained in the Insolvency Act 1986, which operate to lift the corporate veil.

INDIAN LAW:-

As most of the provisions of Indian Law were borrowed from the English Law, it more or less resembles the English Law. Salomon’s case has been the authority ever since in the decisions of the doctrine in Indian company cases.

The Supreme Court in Tata Engineering Locomotive Co. Ltd v. State of Bihar & othrs (1964) stated: “the corporation in law is equal to a natural person and has a legal entity of its own. The entity of corporation is entirely separate from that of its shareholders; it bears its own names and has seal of its own; its assets are separate and distinct from those of its members; the liability of the members of the shareholders is limited to the capital invested by them; similarly, the creditors of the members have no right to the assets of the corporation.” In some of the cases, judicial decisions have no doubt lifted the veil. Gower has summarized the position with the observation that in a number of cases the legislature has rented in many respects, the veil woven by Salomon’s case. According to Gower, the courts have only construed the statutes as “cracking open the corporate shell” when compelled to do so by the clear words of the statute. Thus, even in India it can be seen that at present, the consensus is that cracking open the veil is somewhat cautious and circumspect.

In LIC of India v. Escorts Ltd (1986), Justice O.Chinnapa Reddy had stressed that the corporate veil should be lifted where the associated companies are inextricably connected as to be in reality, part of one concern. After the Bhopal Gas leak disaster case, the lifting of corporate veil has been escalated. Furthermore in State of UP v. Renusagar Power Company, the Supreme court lifted the veil and held that Hindalco, the holding company and its subsidiary, Renusagar company should be treated as one concern and that the Power Plant of Renusagar must be treated as the own source of generation of Hindalco and on that basis, Hindalco would be liable to pay the electric duty. After the decision in Renusagar case, the doctrine has been considered in several other cases.

 

STATUTORY PROVISIONS: INDIAN AND ENGLISH LAW

INDIAN LAW:

The Companies Act, 1956, provides for circumstances when a veil is to be lifted. These circumstances are as follows:-

1) When membership is reduced: Under section 45 of the Companies Act, when the number of members of a company are reduced below 7 in case of a public company and below 2 in case of a private company and the company continues to carry on its business for more than 6 months while the number is so reduced, every person who is a member of such company, knows this fact, is severally liable for the debts of the company contracted during that time.

2)Improper use of Name: Section 147(4) provides that an officer of a company who signs any Bill of Exchange, Hundi, Promissory note, cheque, wherein the name of the company is not mentioned in the prescribed manner, such officer shall be held personally liable to the holder of such Bill of exchange, hundi, promissory note or cheque as the case may be; unless it is duly paid by the company.

3) Fraudulent conduct: If in the course of winding up of a company, it appears that any business of the company has been carried on with the intent to defraud the creditors of the company or any other person or for any other fraudulent purpose, the persons who were knowingly parties to the carrying on of the business, in the manner aforesaid, shall be personally liable for all or any of the debts or other liabilities of the company, as the court may direct. [section 542]

4)Failure to refund application money: Section 69(5) of the Act provides that the directors of a company are jointly and severally liable to repay the application money with interest, if the company fails to refund the application money of those applicants who have not been allotted shares within 130 days from the date of issue of the prospectus. However, this does not in any way affect the very existence of the company or indeed its subsequent independent personality and other features.

 

ENGLISH LAW:

 

1) Doing business without trading certificate required under section 761(CA2006): Section 767(3) of the Companies Act 2006 provides that a contravention of section 761 does not affect the validity of a transaction entered into by the company, but if a company—

(a)enters into a transaction in contravention of that section, and

(b)fails to comply with its obligations in connection with the transaction within 21 days from being called on to do so,

the directors of the company are jointly and severally liable to indemnify any other party to the transaction in respect of any loss or damage suffered by him by reason of the company’s failure to comply with its obligations.

767(4): The directors who are so liable are those who were directors at the time the company entered into the transaction.

 

2)Disqualification of Directors: Under Section 15 of the Company directors disqualification Act 1986, if a person who has been disqualified from being a director of, or involved in the management of a company acts in contravention of his disqualification he will be liable for all those debts of the company which were incurred when he was so acting. The same applies to a person who knowingly acts on the instructions of a disqualified person or an undischarged bankrupt.

3) Offence of fraudulent trading (s.993, CA2006):

Criminal liability

(1)If any business of a company is carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, every person who is knowingly a party to the carrying on of the business in that manner commits an offence.

(2)This applies whether or not the company has been, or is in the course of being, wound up.

 

4) Fraudulent trading. (S.213 of the Insolvency Act 1986)

Civil liability

(1)If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the following has effect.

(2)The court, on the application of the liquidator may declare that any persons who were knowingly parties to the carrying on of the business in the manner above-mentioned are to be liable to make such contributions (if any) to the company’s assets as the court thinks proper.

 

5)Wrongful trading (S.214 of the Insolvency Act 1986)

It is similar to the provisions of section 213. This section operates only in cases of insolvent liquidation and the declaration can be made only against the person who at the time before the commencement of winding up was a director of the company and know or ought to have concluded that there was no reasonable perospect that the company would avoid going into liquidation. In this section “director” includes a shadow director.

6) Restriction on re-use of company names. ( section 216 of Insolvency Act 1986)

(1)This section applies to a person where a company (“the liquidating company”) has gone into insolvent liquidation on or after the appointed day and he was a director or shadow director of the company at any time in the period of 12 months ending with the day before it went into liquidation.

(2)For the purposes of this section, a name is a prohibited name in relation to such a person if—

(a)it is a name by which the liquidating company was known at any time in that period of 12 months, or

(b)it is a name which is so similar to a name falling within paragraph (a) as to suggest an association with that company.

(3)Except with leave of the court or in such circumstances as may be prescribed, a person to whom this section applies shall not at any time in the period of 5 years beginning with the day on which the liquidating company went into liquidation—

(a)be a director of any other company that is known by a prohibited name, or

(b)in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of any such company, or

(c)in any way, whether directly or indirectly, be concerned or take part in the carrying on of a business carried on (otherwise than by a company) under a prohibited name.

(4)If a person acts in contravention of this section, he is liable to imprisonment or a fine, or both

 

CURRENT SCENARIO:

In Volume 32A of Words and Phrases (West Publishing Company – third reprint 1989 p.84) the term “piercing the corporate veil” is described as, “the Court’s unwillingness to permit corporate presence and action to divert judicial course of applying law to ascertain facts”. When this principle is invoked, it is permissible to show that the individual hiding behind the corporation is liable to discharge the obligations ignoring the concept of corporation as a separate entity. Generally, an incorporated company is liable as a juristic person. It is different from its shareholders and Board of directors of Company. The acts of malfeasance and misfeasance and acts of misdemeanor by the shareholders and directors of a corporation (company), do not always bind the company as such. However so as to apply law to ascertained facts, judicial process can ignore juristic personality of the company and haul-up the directors and in certain cases even shareholders to discharge the legal obligations. When the corporate veil is lifted/pierced, it only means that the Court is assuming that the corporate entity of a concern is a sham to perpetuate the fraud, to avoid liability, to avoid effect of statute and to avoid obligations under a contract.

In Skipper Construction Company (Private) Limited (supra), the Supreme Court referred to the principle of lifting corporate veil. After referring Palmer’s Company Law as well as Modern Company Law by Gower, it was observed as under:-

The concept of corporate entity was evolved to encourage and promote trade and commerce but not to commit illegalities or to defraud people. The corporate veil indisputably can be pierced when the corporate personality is found to be opposed to justice, convenience and interest of the revenue or workman or against public interest.

In Trustor AB v. Smallbone (No.2)(2001), the Vice-Chancellor concluded:

“Companies are often involved in improprieties. Indeed there was some suggestion to that effect in Saloman v Saloman &Co. Ltd (1897) AC 22. But it would make undue roads into the principle of Saloman v Saloman if an impropriety not linked to the use of the company structure to avoid or conceal the liability of it if the company was used as a device or facadde to conceal the true facts thereby avoiding or concealing any liability of those individuals.”

Just as in the case of Jones v. Lipman (1962) the corporation must be the device through which the impropriety is conducted, impropriety alone will not suffice.

CONCLUSION:

The categorizations offered by Ottolenghi (1990) describes as to when the courts had lifted the veil in the past. But the future of doctrine is still ambiguous as to how the courts determine the question in a certain situation. Yet one can say that the courts shall lift the veil sometimes and refuse to do so in the other. It can be said that the corporate veil lifting is being considered on very rare occasions by the English Courts while the Indian doctrine is still in its transitory phase. The Indian courts ordinarily appreciate the facts of each case and decide on the merits.

 

REFERENCES

1) Salomon v. Salomon & Co. Ltd. [1897] A.C. 22.

2) Maurice Wormser, Piercing the Veil of Corporate Entity, 12 COLUMN. L. REV.496 (1912)

3) Littlewoods Mail Order Stores Ltd. v. IRC [1969] 1 W.L.R. 1241, 1254

4) Robert B. Thompson, Piercing the Corporate Veil: Is the Common Law the Problem? 37 CONN. L. REV. 619, 622 (2005).

5) Adams v Cape Industries Plc [1990] Ch. 433 (CA (Civ Div)

6) Life Insurance Corporation of India v. Escorts Ltd., AIR 1986 SC 1370

7) State of UP v. Renusagar Power Company (AIR 1988 SC 1737)

8) (See CIT v. Sri Meenakshi Mills Ltd., Workmen v. Associated Rubber Industry Ltd., New Horizons Ltd. v. Union of India, State of U.P. v. Renusagar Power Co., Hussainbhai v. Alath Factory Thezhilali Union and Secy., H.S.E.B. v. Suresh)

9) Delhi Development Authority v. Skipper Construction Co. (P) Ltd. (1997) 89 Comp Cas 362 (SC)

10) New Horizons Ltd. v. Union of India (1997) 89 Comp Cas 849 (SC)

11) Ottolenghi(1990): ‘From peeping behind the corporate veil to Ignoring it completely’ [1990] MLR 338 http://onlinelibrary.wiley.com/doi/10.1111/j.1468-2230.1990.tb01816.x/pdf

12) PIERCING THE CORPORATE VEIL AMONG AFFILIATED COMPANIES IN THE EUROPEAN COMMUNITY AND IN THE US.: A COMPARATIVE ANALYSIS OF U.S., GERMAN, AND U.K. VEIL-PIERCING APPROACHES American Business Law Journal Volume 36, Issue 1, pages 73–149, Fall 1998

13) Company Law by Alan Dignam &John Lowry 5th edition; Oxford publications UK

14) Woolfson v Strathclyde Regional Council [1978] UKHL 5: Lord Keith upheld the decision of the Scottish Court of Appeal, refusing to follow and doubting DHN v Tower Hamlets BC

15) DHN Food Distributors Ltd. v. Tower Hamlets London Borough Council (1976) 1 WLR 852

16) Company Law by Avtar Singh: 15th edition

17) Gallagher and Zeighler ‘Lifting the Corporate veil in Pursuit of Justice’[1990] JBL 292

18) Moore ‘A temple built on faulty foundations’[2006] JBL 180

19) Davies Gower and Davies’ Principles of modern company law, 8th edition ch: 8 & 9

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