"Alter Ego" is a derived term from Latin. Literally translated, it means the "Other I". More colloquially it can be understood as the second self or a person's clone. It is a common tenet that a company is a separate legal entity from its shareholders and directors. This common law principle grants immunity to the shareholders and directors from being held liable for the debts as well as criminal liabilities of the corporation. The doctrine of alter ego, however, provides for an exception to this presumption in law. Alter ego is the doctrine which prevents the stakeholders of the corporation, i.e., shareholders and directors from taking the refuge of doctrine of separate legal entity. Hence, the Doctrine of alter ego is based on lifting of the corporate veil between the directors/ shareholders and the corporation and treating both as one entity.
The doctrine of alter ego is based on the assumption that the corporation as well as the shareholders and the managing directors are the alter egos of each other, i.e., one is the shadow or reflection of the other or can be understood as two sides of the same coin. Hence, the courts can rely on alter ego doctrine when they find that there is a very thin line of distinction between the shareholders/ directors and the corporation or a limited liability corporation.
LEGAL POSITION OF THE DOCTRINE OF ALTER EGO IN OTHER JURISDICTIONS:
POSITION IN THE UNITED STATES OF AMERICA:
In the case of MCI Telecommunications Corp. v. O'Brien Mktg., 1 it was reiterated that the federal common law alter ego rule requires that three elements be proved in order to pierce the corporate veil, i.e., the essentials for applicability of alter ego rule are:
- "(1) Control, not mere majority or complete stock control, but complete domination, not only of finances, but of policy and business practices in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; and
- (2) Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or a dishonest and unjust act in contravention of plaintiff's legal rights; and
- (3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of."
In fact, it is interesting to note that the concept of alter ego has also been extended by the Appellate court in an appeal from Circuit court to a criminal case. In the case of People v. Abrams, 2 the Courts had applied the alter ego doctrine differently, where the Defendant, Fred Abrams was accused of theft from the company. However, in his defence, the Defendant contended that the money was not misappropriated from the Corporation but from the Complainant, Lev. The Court held as follows – "First, the alter ego doctrine of corporate law was developed for and has been traditionally used by third persons injured due to their reliance on the existence of a distinct corporate entity. In re Rehabilitation of Centaur Insurance Co3 , The doctrine fastens liability on the individual or entity that uses a corporation merely as an instrumentality to conduct that person's or entity's business.4 It was held in the case of A.G. Cullen Construction, Inc. v. Burnham Partners, LLC, 2015 IL App (1st) 122538 in the context of "piercing the corporate veil," an alter ego analysis starts with examining the factors which reveal how the corporation operates and the particular party's relationship to that operation. Generally, did the corporation function simply as a facade for the dominant shareholder? Id. Here, without question, the corporate entity, The Fred Lev Company, served as the alter ego or business conduit of Lev, and Abrams' own testimony confirmed it." Hence, the Courts held the corporation and the Complainant (Lev) to be one entity and held Fred Abrams guilty for theft.
POSITION IN THE UNITED KINGDOM:
The Alter ego doctrine is also referred to as the "Identification Theory" in the United Kingdom. As the company and the individual are considered as a single entity, any agreement with a third party is considered a bipartite agreement. Lord Denning, J. in the case of H L Boulton (Engineering) Co. Ltd v. T J Graham and Sons Ltd5 has held:
"A company in many ways may be likened to a human body. It has a brain and a nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company and control what it does. The state of mind of these managers is the state of mind of the company and is treated by the law as such."
Since, the company and the individual are considered to be a single entity, there is no applicability of concept of vicarious liability and the company becomes directly liable for offences involving mens rea responsibility.
In the case of Tesco Supermarkets Ltd. v Nattrass6 , the House of Lords further stated that the basis of the doctrine of alter ego is that a living person has a mind which can have knowledge or intention or be negligent and has hands to carry out his intentions. Whereas, a corporation has none of these it must act through living persons. In such a situation, person who acts is not speaking or acting for the company, but as the company itself. He does not act as a servant, representative, agent or delegate. If his mind is a guilty mind, then that guilt is the guilt of the company.
POSITION IN INDIA:
The Supreme Court of India, in the judgment of Sunil Bharti Mittal v Central Bureau of Investigation7 , clarified the law of "alter ego". In the instant case the Special Judge had summoned and proceeded against the Directors of the Company. The Special Judge, had held "On the other hand, the reason for summoning these persons and proceeding against them are specifically ascribed in this para which, prima facie, are:
- These persons were/are in the control of affairs of the respective companies.
- Because of their controlling position, they represent the directing mind and will of each company.
- State of mind of these persons is the state of mind of the companies. Thus, they are described as "alter ego" of their respective companies.
The Apex Court while overruling the decision of the Special Judge, observed that while the Special Judge had applied the principle of alter ego, it had done so in reverse. The criminal mens rea had been attributed to the directors on the assumption that they are the directing minds behind the acts of the Company. The Supreme Court observed that the Special Judge had ignored the fact that such an interpretation of the alter ego doctrine would go against the position of law that there is no vicarious liability in criminal law, unless expressly provided in the statute. Justice Sikri relied on various judgements of the Supreme Court, including the landmark judgment of Maksud Saiyed v. State of Gujarat8 stated – "No doubt, a corporate entity is an artificial person which acts through its officers, directors, managing director, chairman etc. If such a company commits an offence involving mens rea, it would normally be the intent and action of that individual who would act on behalf of the company. It would be more so, when the criminal act is that of conspiracy. However, at the same time, it is the cardinal principle of criminal jurisprudence that there is no vicarious liability unless the statute specifically provides so."
The Supreme Court then relied on the case of Iridium India Telecom Ltd. vs. Motorola Incorporated and Ors9 and held that "the criminal intent of the "alter ego" of the company/body corporate i.e. the person or group of persons that guide the business of the company, would be imputed to the corporation." The Court based its decision on the doctrine of attribution and imputation. By this rationale, the mens rea can be attributed to a corporation in criminal cases when the affairs of the corporation are carried out by a person or a body person who are in charge of the affairs of the corporation in course of its business. The control should be such and so intense that the company can be said to be functioning through the actions of the person or body of person. Hence, a corporation would be convicted of both statutory as well as criminal offences.
The position regarding the concept of doctrine of alter ego or imputation of criminal liability to corporations was confusing in India. However, the Supreme Court has definitely brought some clarity regarding the applicability of the doctrine of attribution and imputation in cases of criminal liability of corporations. However, it is still left open to be seen on how a company will be independently attributed with criminal liability when the directors of the corporation have not been held guilty for the criminal offence.
1. 913 F. Supp. 1536 (S.D. Fla. 1995)
2. 260 Ill App. 3d 566 (1994)
3. 158 Ill. 2d 166, 173 (1994)
4. Peetoom v. Swanson 334 Ill. App. 3d 523, 527 (2002)
5. (1956) 3 All E.R. 624 @ 630
6. 1971) 2 All E.R. 127
7. AIR 2015 SC 923
8. (2008) 5 SCC 668
9. AIR 2011 SC 20
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