A company incorporated under the provisions of the Companies Act is a juristic person and has a corporate identity. The House of Lords in Salomon Vs. Salomon & Co. Ltd. case had held that in law a company as a person is altogether different and distinct from its shareholders or directors. The directors of the company are not liable for the debt of the company except to the extent permissible by law. If the directors of a company have agreed to be personally liable to satisfy the decree or the award passed against the company, the decree can be executed / enforced against such directors. As a general proposition, the directors or the shareholders would not be liable whenever a Decree or Award is passed against a company.
The law permits invoking of doctrine of lifting of the corporate veil. Indian courts have created an exception to the principle laid down in Salomon vs Salomon & Co. Ltd case to cover the cases of fraud, inappropriate conducts etc. But the Award Holder or the Decree Holder must make out a case of fraud, inappropriate conduct etc. to hold the Directors of a company liable for the Decree / Award to enforced against them.
The hon'ble Supreme Court, in Balwant Rai Saluja & Anr. Vs. Air India Ltd. & Ors. as reported in 2014(9) SCC 407, had laid down the law with regard to the principle of piercing the corporate veil which is an exception to the principle that a company is a distinct and separate entity i.e., it is distinct from its shareholders and directors and that the company had its own legal rights and obligations. The doctrine of piercing corporate veil would apply in a restrictive manner and would apply only when it is evident that the company was a camouflage, or a sham deliberately created by the persons exercising control over the said company for the purposes of avoiding the liability. The relevant portion of the said judgment is extracted herein below for the sake of convenience:
69. Vodafone case [Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613 : (2012) 3 SCC (Civ) 867] further made reference to a decision of the US Supreme Court in United States v. Bestfoods [141 L Ed 2d 43 : 524 US 51 (1998)]. In that case, the US Supreme Court explained that as a general principle of corporate law a parent corporation is not liable for the acts of its subsidiary. The US Supreme Court went on to explain that corporate veil can be pierced and the parent company can be held liable for the conduct of its subsidiary, only if it is shown that the corporal form is misused to accomplish certain wrongful purposes, and further that the parent company is directly a participant in the wrong complained of. Mere ownership, parental control, management, etc. of a subsidiary was held not to be sufficient to pierce the status of their relationship and, to hold parent company liable.
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 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. [1897 AC 22 : (1895- 99) All ER Rep 33 (HL)] Lord Halsbury LC, negating the applicability of this doctrine to the facts of the case, stated that: (AC pp. 30 & 31)
"[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."
Most of the cases subsequent to Salomon case [1897 AC 22 : (1895-99) All ER Rep 33 (HL)] , attributed the doctrine of piercing the veil to the fact that the company was a "sham" or a "façade". However, there was yet to be any clarity on applicability of the said doctrine.
71. In recent times, 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.
74. 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.
- The hon'ble Supreme Court in Balwant Rai Saluja (Supra) case was pleased to hold that the courts will not lift the corporate veil unless it is satisfied that the principles laid down by the English Court in Ben Hassan case are satisfied. The courts are required to be satisfied that there is some impropriety and there must be both control of the company by the wrongdoers and impropriety i.e., use and misuse of the company by them as sham or façade.
- The hon'ble Bombay High Court recently in a judgment dated 07.02.2020 in case titled Mitsui OSK Lines Ltd. v. Orient Ship Agency Pvt. Ltd. in Chamber Summon No. 157 of 2019 relied upon the judgments rendered by the hon'ble Supreme Court in Balwant Rai Saluja (Supra.) case and other cases and was pleased to hold as follows:
78. It is clear from the decision in Prest (supra), that the concealment principle does not involve piercing the Corporate Veil at all. It applies where there is interposition of a company or perhaps several companies so as to conceal the identity of the real actors. This will not deter the courts from identifying them, assuming that their identity is legally relevant. It has been held that the Court is not disregarding the "facade", but only looking behind it to discover the facts which the corporate structure is concealing. This is in counter distinction with the evasion principle. The learned Senior Counsel appearing for the Award Holder has upon placing reliance on the judgment in Prest (supra), relied upon the decision of the Supreme Court in Arcelormittal India Private Ltd. (supra)
The hon'ble High Court observed that Prest (supra) was not a case of execution of a decree or an award.
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