Introduction:
Corporations have evolved to become one of the most significant parts of the modern world. The origin of Indian company law can be traced back to the 1850s, with the Joint Stock Companies Act of 1850 being the first such legislation to be enforced. The incorporation of a company and subsequent compliances are currently governed by the Companies Act of 2013. One of the most prominent aspects in this regard may be the doctrine of lifting of the corporate veil, which derives its origins from the Theory of Separate Legal Personality. This theory provides the company with an identity that is separate from its directors, shareholders, or members in general. This article aims to illuminate the notion of lifting the corporate veil and the judicial precedents that highlight the conditions under which it may be lifted. Nonetheless, prior to delving into this domain, it is imperative that we comprehend the concept of distinct legal personalities.
SEPARATE LEGAL PERSONALITY VIS-A-VIS SALOMON v. SALOMON:
It is entirely accurate to refer to the principle of distinct legal personality as the fundamental tenet of contemporary corporate law. This concept originated in the landmark case of Salomon v. Salomon, which remains highly regarded and often cited by courts in numerous jurisdictions, not just in England. This case involved the unsecured interests of creditors following the liquidation of Salomon Ltd, where Salomon was the majority shareholder. It was argued that the company was a sham, simply an extension of Salomon himself, and that Salomon should therefore be subject to unlimited personal liability.
The Court of Appeal held Salomon personally liable, stating that the incorporation of the company violated the principles of the Companies Act, 1862, rendering it a ‘myth' and merely an agent for Salomon's business activities, thus rendering him personally liable. However, this decision was reversed on appeal by the House of Lords. The Lords unanimously held that since the company was duly incorporated, it possessed its own rights and liabilities, and that the motives behind its promotion were irrelevant in determining those rights and liabilities. This case also established the notion of the "corporate veil," which distinguishes the organization from its owners, founders, and controllers. It paved the way for numerous other significant judgments, such as Lee v. Lee Air Farming Ltd. and Macaura v. Northern Assurance Co Ltd.
GROUNDS FOR LIFTING OF CORPORATE VEIL
It is widely acknowledged that the Theory of Separate Legal Personality is not absolute, and that courts have the authority to reveal any malpractice conducted by individuals or groups under the cover of a limited liability company. The principle established in the Salomon case has been reiterated on numerous occasions by the Indian judiciary. Nonetheless, it is imperative to comprehend that the lifting of the corporate veil is not a firmly established principle in India, as the precise prerequisites for its implementation have not been explicitly defined in any current statute. The Companies Act of 2013 addresses this doctrine indirectly through provisions such as misstatements in prospectuses (sections 34 and 35), fraudulent conduct of business (section 339), fraudulent application for removal of name (section 251), and ultra vires acts.
Munby J.'s judgment in the English law case Ben Hashem v. Al Shayef has firmly established the principles for lifting the corporate veil. These principles are as follows:
- Ownership and control of a company are insufficient grounds for piercing the corporate veil.
- The court cannot pierce the corporate veil simply because it is deemed necessary in the interests of justice, even in the absence of third-party interests.
- The corporate veil can only be pierced if there is some impropriety involved.
- The impropriety must be connected to the use of the company structure to evade or conceal liability.
- To justify piercing the corporate veil, there must be both control of the company by the wrongdoer(s) and impropriety, meaning the company must be used or misused as a device or facade to hide their wrongdoing.
- The company may be considered a "facade" even if it was not originally set up with deceptive intent, as long as it is being used for deception at the time of the relevant transactions. The court will pierce the corporate veil only to the extent necessary to provide a remedy for the specific wrong committed by those controlling the company.
It is important to emphasize that lifting the corporate veil is an exception rather than the rule. In cases where an individual or group of individuals controls the company's daily operations, the company may be considered their alter ego. Courts can then rely on statutory provisions or judicial precedents based on the specific facts and circumstances of the case. In Delhi Development Authority v. Skipper Construction Co. (P) Ltd., the Hon’ble Supreme Court of India observed that the concept of separate legal personality is intended to encourage and promote trade, not to facilitate illegal activities or defraud people under the guise of a company. The relevant extract is as follows:
"The concept of corporate entity was developed to encourage and promote trade and commerce but not to commit illegalities or to defraud people. Therefore, when the corporate character is used for illegal purposes or to defraud others, the court will disregard the corporate character and look at the reality behind the corporate veil to enable it to pass appropriate orders to ensure justice between the parties involved. …"
Alter Ego and Agency Theories
Recent trends also show an increasing reliance on the alter ego and agency theories to pierce the corporate veil. Courts have been more inclined to pierce the veil when they find that the corporation is acting as an alter ego of its shareholders or directors or as an agent for their personal interests.
Case Example: Equity Trust (Jersey) Ltd v. Halabi (2016)
In this case, the Privy Council applied the alter ego theory to hold the individual behind the company personally liable. The court found that the company was merely a façade for the individual's personal dealings, thereby justifying the piercing of the corporate veil.
The Judicial View
Over the past decade, the Indian judiciary has frequently upheld the principles established by English courts in landmark cases like Salomon and Ben Hashem, thereby reinforcing the theory of separate legal personality. It is crucial to understand that the doctrine of corporate veil cannot be invoked arbitrarily and is applied with great caution. This section examines instances where the judiciary decided against lifting the corporate veil, thus upholding the theory of separate legal personality.
Life Insurance Corporation of India v. Escorts Ltd.
In this case, the Hon’ble Supreme Court of India reiterated the Salomon principle, observing that the corporate veil should be lifted only in exceptional circumstances. The Court stated:
“Generally and broadly speaking, 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 beneficial 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 public interest, the effect on parties who may be affected, etc.”
This judgment underscores the need for specific and compelling reasons to justify piercing the corporate veil, reflecting a cautious approach by the judiciary.
Balwant Rai Saluja v. Air India Ltd.
In this case, the Hon’ble Supreme Court of India emphasized that the principle of lifting the corporate veil is an exception to the principle of separate legal entity and should be applied very restrictively. The Court held:
“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, only in scenarios where it is evident that the company was a mere camouflage or sham deliberately created by the persons exercising control over the company for the purpose of avoiding liability. The intent of piercing the veil must seek to remedy a wrong done by the persons controlling the company. The application thus depends on the peculiar facts and circumstances of each case.”
This judgment highlights the restrictive application of the doctrine, ensuring that it is used only when there is clear evidence of a company being a sham.
Sanuj Bathla v. Manu Maheshwari & Anr.
In this case, the Hon’ble Delhi High Court held that allegations of fraud must be meticulously contested and proven in detail. The Court stated:
“It is well settled that fraud, if alleged, must be pleaded meticulously and in detail and proven to the hilt. A mere assertion that fraud has been committed is neither here nor there. Precisely and in what manner fraud has been committed must be delineated by the party alleging the same if the plea of fraud is to be made the basis of a decree against the other party. Bald assertions and vague allegations will not be countenanced by the Courts. Rule 4 of Order VI specifically lays down that the particulars of the fraud alleged (with dates and items, if necessary) shall be stated in the plaint.”
This judgment reinforces the requirement for detailed and specific allegations of fraud to justify lifting the corporate veil.
Conclusion:
It is therefore clear that, even though lifting the corporate veil is an exception to the theory of separate legal personality, it is by no means sacrosanct. In exceptional circumstances, the metaphorical veil can be lifted to reveal the masterminds behind the company's fraudulent conduct. However, if there is no obvious veil, courts must uphold the sanctity of the principle of separate legal personality of a company.
