INTRODUCTION

Being a body corporate, the word 'Company' has been defined under Section 2(20)1 of the Companies Act, 2013 as a company incorporated under this Act or under any previous company law. The principle of Company having a legal personality separate from its members can be traced long back in the history of corporate law. Separate legal personality ensues separate rights, obligations, debts, assets, profits and liabilities independent from its directors and shareholders. The separate legal personality of the Company comes into existence right from the date of issuance of certificate of incorporation under the Act.2 This principle was long back recognized in the case of Salomon v. A Salomon and Co. Ltd.3 in the words of Lord Macnaghten as, "the company is at law a different person altogether from the subscribers to the memorandum4".

The doctrine of separate legal entity is considered as one of the fundamental principles of Company Law. The Hon'ble Supreme Court in A.P. State Road Transport Corporation's case,5 observed that the doctrine that a corporation has a separate legal entity is "so firmly rooted in our notions derived from common law that it is hardly necessary to deal with it elaborately".

EVILS OF THE DOCTRINE OF SEPARATE LEGAL ENTITY

Even though this principle stands fundamental in the jurisprudence of Company Law, it gives way to both privileges and scope of misuse. This principle entails that since the company has separate legal personality, it can both sue and be sued in its own name, but the fact remains that its juristic personality makes it dependent on human agencies. These human agents function on behalf of the company but as a natural consequence, are immune from its liabilities. Evaluation in this manner would make the members function dubiously and at the same time avail the privilege of a corporation's separate legal personality. Therefore, to safeguard against such possible misuse, judicial systems across the world have come up with a mechanism to unveil the hideous approach and disregard the separate legal personality in specific circumstances. This is popularly known as 'lifting of the corporate veil', which stands an exception to the doctrine of separate legal existence.

PIERCING OF CORPORATE VEIL AS A MEASURE OF PREVENTING MISUSE OF THE DOCTRINE

In Balwant Rai Saluja v. Air India Ltd.,6 the Court observed that "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 and attribute the acts of the company to those who are allegedly in direct control of its operation. The starting point of this doctrine was discussed in the celebrated case of Salomon v. Salomon & Co. Ltd.7 Lord Halsbury LC, negating the applicability of this doctrine to the facts of the case stated that: "a company must be treated like any other independent person with its rights and liabilities (legally) appropriate to itself...whatever may have been the ideas or schemes of those who brought it into existence."

As observed from the above, the doctrine of lifting of the corporate veil traces its origin to the landmark decision of the House of Lords in Salomon v. A Salomon and Co. Ltd.,8 wherein the Court for the first time recognized the principle of unveiling the corporate structure. Having been established from Salomon's case, the doctrine of lifting of the corporate veil allows the court to unmask the person acting behind the corporate facade and to catch hold of the persons having real control over the affairs of the company. The Courts apply this doctrine in cases where persons having substantial control of the company try to use the incorporation as a mere camouflage to prevent the liability from being incurred on them. In such cases, the Courts pierce the veil and impose liability on the persons exercising real control over the company so as to remedy a wrong perpetrated by them but the courts must be cautious enough to not use as a course of action.

JUDICIOUS RESORT TO PIERCING OF CORPORATE VEIL

The Hon'ble High Court of Delhi in the case of New Horizons v. Union of India,9 by quoting the following passage from Palmer has made an observation that10 "In practice, the ability to choose between the application of the rule in Salomon's case and the jurisdiction to pierce the veil of corporateness gives the courts a considerable degree of discretion and enables them to do justice and to decide individual cases in accordance with equitable consideration. But it should be emphasized that the rule in Solomon's case is still the principle and the instance of piercing the veil are the exceptions, though their number is growing".

Justice Munby in Ben Hashem v. Ali Shayif11 has formulated six principles in law as serving grounds for lifting of the corporate veil, which are as follows:

  1. Ownership and control of a company were not enough to justify the piercing the corporate veil.
  2. 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 interest of justice;
  3. The corporate veil can be pierced only if there is some impropriety;
  4. The impropriety in question must be linked to the use of the company structure to avoid or conceal liability;
  5. To justify piercing the corporate veil, there must be both controls of the company by the wrongdoers and impropriety, that is use or misuse of the company by them as a device or façade to conceal their wrongdoing; and
  6. 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.

It can be analyzed that both doctrines stand clearly established as principles in law, but the problem that is often posed before the courts of equity revolves around its just and reasonable application. The Courts while deciding any dispute has a higher duty to not let any doctrine to be applied indiscriminately and to follow a rational approach so as to maintain a balance between the principle in law and the principle devised for safeguarding against its possible misuse. This remedy of last resort can be found in Lord Sumption's formulation of the test of veil piercing in the case of Prest v. Petrodel Resources Ltd.,12 wherein he observed that, "there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control.

The court may then pierce the corporate veil for the purpose, and only for the purpose of depriving the company or its controller of the advantage that they would otherwise have obtained by the company's separate legal personality". He further added a line of caution stating that the facts will in practice disclose a legal relationship between the company and its controller which will make it unnecessary to pierce the corporate veil... if it is not necessary to pierce the corporate veil, it is not appropriate to do so.

This has been the position in law concerning the principle of corporate veil at the global level which has been welcomed even by the Indian judiciary through its various decisions. Relevant for discussion is the decision of the Constitution Bench in the case of LIC v. Escorts Ltd13 wherein the Court observed that, ".....Generally and broadly speaking, we may say that the corporate veil may be lifted where a statute itself contemplated 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 or desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessary 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."

The caution of careful application of this doctrine can also be traced in the case of case of Balwant Rai Saluja v. Air India,14 wherein the court ruled that "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 allowed 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."

FRAUD AS A GROUND FOR LIFTING OF CORPORATE VEIL

It appears from the above discussion that courts have wide discretion in the arena of lifting of the corporate veil to be exercised considering facts and circumstances of each case. However, the most common ground based on which corporate veil has been often lifted by the courts among others is fraudulent or improper conduct. If the court comes to the conclusion that the members of the company are using the corporate facade to indulge in fraudulent activities and deceive the rightful demands of the aggrieved, the court can lift the corporate veil, at any stage of the proceedings.

This can be explained with the case of DHN Food Distributors Ltd. & Ors. v. London Borough of Tower Hamlets,15 wherein the Court of Appeal ruled as, "there is evidence of a general tendency to ignore the separate legal entities of various companies within a group, and to look instead at the economic entity of the whole group" Lord Denning, M.R. has observed in the same case: "This group is virtually the same as a partnership in which all the three companies are partners. They should not be treated separately so as to be defeated on a technical point." Goff, L.J., in the said case, noted that "This is a case in which one is entitled to look at the realities of the situation and to pierce the corporate veil."16

This position can be best explained with the case of Delhi Development Authority v. Skipper Construction Co. (P.) Ltd.17 wherein the Hon'ble Supreme Court had observed that, "The concept of corporate entity was evolved to encourage and promote trade and commerce : but not to commit illegalities or to defraud people. Where, therefore, the corporate character is employed for the purpose of committing illegality or for defrauding others, the court would ignore the corporate character and will look at the reality behind the corporate veil so as to enable it to pass appropriate orders to do justice between the parties concerned.

The fact that Tejwant Singh and members of his family have created several corporate bodies does not prevent this Court from treating all of them as one entity belonging to and controlled by Tejwant Singh and family if it is found that these corporate bodies are merely cloaks behind which lurks Tejwant Singh and/or members of his family and that the device of incorporation was really a Ploy adopted for committing illegalities and/or to defraud people." Additionally, the court noted that "We are of the opinion that the holding in Attorney General for India v. Amratlal Prajivendas18 and in Attorney General for Hang Kong v. Reid,19 should guide us while exercising the extra-ordinary powers of this Court while acting under the said Article form making appropriate orders for doing complete justice between the parties*. The fiduciary relationship may not exist in the present case nor is it as case of a holder of public office, yet if it is found that someone has acquired properties by defrauding the people and if it is found that the persons defrauded should be restored to the position in which they would have been but for the said fraud, the court can make all necessary orders. This is what equity means and in India the Courts are not only courts of law but also courts of equity."20

STANDARD OF PROOF IN CONTESTING FRAUD

Furthermore, the Hon'ble Delhi High Court in the case of Sanuj Bathla v. Manu Maheshwari21 observed as, "It is also well settled that fraud, if alleged, must be pleaded meticulously and in detail and proved 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 is required to 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 VI22 specifically lays down that the particulars of the fraud alleged (with dates and items, if necessary) shall be stated in the plaint."

Since it is an established principle of law that "Fraud" vitiates even the most solemn proceedings in any civilized system of jurisprudence,23 the party relying upon the principle of lifting of the corporate veil on the ground of fraud must not only assert such position in law but also prove it in all its material particulars. This position has been again reiterated in the recent case of Sunheri v. Maha Singh and Ors.,24 wherein the Bench of Justice Alka Sarin held that "fraud has not only to be specifically pleaded but also proved. In the present case the plaintiff-appellant failed to establish and prove that any fraud had been committed up on her by the defendant-respondents. No doubt that fraud vitiates everything inasmuch as it affects the very solemnity of the proceedings, however, by now it is the settled law that fraud has to be pleaded and established by leading cogent evidence. An ambiguous statement cannot per se make a document fraudulent."

Footnotes

1. s 2 (20), Companies Act 2013.

2. s 7, Companies Act 2013.

3. Salomon V A Salomon and Co Ltd., [1897] A.C. 22.

4. Mukesh Hans & Anr v Smt. Uma Bhasin & Ors.

5. A.P. State Road Transport Corporation's case, AIR 1964 SC 1486.

6. Balwant Rai Saluja V. Air India Ltd, CA No. 10264-10266 Of 2013.

7. Supra note 3.

8. Supra note 3.

9. New Horizons v Union of India., (1994) Vol. 13, Issue No. 7, C.L.A. 429, 439-442.

10. Company Law (25th ed.).

11. Ben Hashem v Al Shayif [2008] EWHC 2380 (Fam).

12. Prest v Petrodel Resources Ltd. [2013] 3 WLR 1.

13. LIC v Escorts Ltd, 1986 AIR 1370.

14. Supra note 6.

15. DHN Food Distributors Ltd. & Ors. v London Borough of Tower Hamlets 1976 (3) All. E.R. 462.

16. Ibid.

17. Delhi Development Authority v Skipper Construction Co. (P.) Ltd., 1996 SCC (4) 622.

18. Attorney General for India v Amratlal Prajivendas [1994 (5) S.C.C.54].

19. Attorney General for Hang Kong v Reid [1993 (3) WLR 1143].

20. Ibid.

21. Sanuj Bathla v. Manu Maheshwari on 12 April, 2021, C.R.P. 166/2018.

22. R4 OVI, Code of Civil Procedure 1908.

23. Shrisht Dhawan (Smt.) v. M/s. Shaw Brothers, (1992 (1) SCC 534).

24. Sunheri v. Maha Singh and Ors, RSA-9720-2018 (O&M)-PUNJ HC.

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