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Lifting Of Corporate Veil In Execution Proceedings – Shareholders

Our legal structure regards company as a legal person having its
own unique personality. This simply means that it can exercise its
own legal rights and can incur legal duties. Despite the existence
of a separate legal personality, a Company acts through its human
agents (i.e directors, promoters and members) who are responsible
for managing the affairs of the company. Although, agents of a
Company are its essence through which it acts but its personality
is different from them.

Peculiarity of a Company lies in the fact that it has a legal
personality of its own, separate from its human agents. One concept
which separates the liabilities of the Company from its human
agents is a Corporate Veil. A veil exists that separates the
Company’s rights, duties and liabilities from that of its human
agents. The humans work on behalf of the company behind this
imaginary curtain which plays an additional role in concealing the
faces of its members, the benefit of which is sometimes taken by
them to commit illegal activities. When this human agency is driven
by the ill intention to dupe the company or its investors and
affiliated persons, the concept of lifting of corporate veil
arises.

Doctrine of lifting of Corporate Veil

Stemming from Salomon1 principle, the Corporate
Veil is a metaphoric curtain that divides the company’s
personality from those who own it and who work under its name. On
paper, the personality of the corporation is a Fictio Juris, but
when it comes down to reality, the business of this artificial
entity is always dealt by natural beings, who are also the
recipients of the corporate advantages.

This corporate veil bears various perks which cannot be
overlooked, it shields the members and the shareholders from the
deleterious effects of the ill-will act done in the name of
Corporation. The doctrine of corporate veil implies that if any
debt is sustained by the Company or if it violates any provision of
law, the human agents will not be held responsible for the
same.

The people in charge or the members perform the work and
transactions on behalf of the Company behind this veil but when
they acts beyond the scope of memorandum and articles of
association or get involved in illegal activities like fraud, this
veil is finally lifted in order to determine and punish the
wrongdoer of such activity and not let the actual wrongdoer get
away under the garb of the veil.

When can Corporate Veil be lifted?

It is given that being an artificial person, a Company is
incapable of committing any fraudulent act but if the corporate
structure is being misused to dodge obligations or to give rise to
any criminal activities, then the Courts would be forced to ignore
the masquerade of corporate personality and to take a look behind
this veil to find the real guilty.2

The Companies act, 2013 indirectly deals with this doctrine
through sections like 251 or 339 which holds shareholders liable
for their wrongful acts. Section 216 of the Act gives power to the
Central government to appoint the inspectors to investigate the
members or owners of the company under shady and suspicious
situations. Thereby, implicitly giving them power to make use of
the doctrine.

The Judiciary uses this doctrine as a tool to bring down the
offender who they feel is using the Company as a shield for his
illegal actions and hold him responsible for such an act instead of
holding the whole company responsible for the same.

The law around lifting of corporate veil has been crystallised
around six principles formulated by Munby, J. in Ben Hashem v. Ali
Shayif3. The six principles, as found at paras 159-64 of
the case are as follows4:

  1. Ownership and control of a company were not enough to justify
    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 interests 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
    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

  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.

In further landmark judgments5,6 it was held
that there must be cogent evidence of the fact that the Directors
are guilty of fraud by alleged siphoning off of funds to frustrate
execution of decree.

The Courts time and again have been lifting this veil based on
the circumstances and facts of each case. In the case of
Farmosa Plastic Corporation Ltd. V. Ashok
Chauhan7
 a foreign decree was passed to be
implemented in India. The Delhi High Court held that the Courts are
at discretion to apply the power of lifting of veil in execution
proceeding. The Hon’ble Delhi Court added that the Courts are
at liberty to lift the cloaks of the Corporations where they are
involved in defrauding others. The decision has been reaffirmed in
Sai Sounds Private limited V Kiran Contractors PVT.
LTD8
.

In Bhatia Industries V. Asian Natural Resources &
Anr9
, an arbitral award was decided in favor of
a foreign entity and against the Indian entity in an international
arbitration proceeding. The award holder i.e. the foreign entity
instituted execution proceeding before the Bombay High Court
challenging that the Indian entity i.e. judgement debtor belongs to
the larger conglomerate of companies incorporated in India and is
involved in fraudulently siphoning off its funds to prevent the
execution of the foreign award. In view thereof, the foreign entity
(award holder) pleaded to the Court to lift the corporate cloak of
the Judgement debtor.

The Court in the instant case stated that the corporate veil in
the execution proceeding could be lifted when it is proved that the
companies are in fact a single economic entity and thus, by
referring to the facts of the case held that the judgment debtor
and its Indian group are single economic entity who are trying to
defeat the execution of the award.

A different stance was taken by The Bombay High Court in
Mitsui OSK Lines vs Orient Ship
agency10
. In this case a foreign award was
passed in 2009 which was also recognized as a decree by the Bombay
High Court in 2014. However, in 2019 the award holder sought
permission of the court to amend execution proceeding to hold
certain associate companies of the judgement debtor personally
liable. The Hon’ble Bombay High Court in this case abstained
from using this doctrine on the ground that the third party
entities were not the part of the original suit and thus, can only
be held liable through a separate substantial suit. The Court
distinguished the present case from Bhatia Industries V.
Asian Natural Resources & Anr
. by pointing that the
award holder in Bhatia case was implicating the companies who were
associated to each other and were a part of a single entity whereas
in the instant case of Mitushi, the award holder was seeking the
leave of the Court to hold third parties personally liable who were
originally not the part of the suit.

Conclusion:

The Courts ad-nauseam have stated that the doctrine of corporate
veil will only apply when it is visible that the company is a
smokescreen intentionally established for commission of offences
and for escaping the liability of such acts under the disguise of
the ‘company’. Through the application of this doctrine in
a cautious manner, the Courts are lifting the veil to put an end to
the shams committed behind the cloak of ‘corporate
personality.’ Different cases introduce new set of opinions of
different judges which more than often expand the horizon of the
doctrine of lifting of corporate veil.

With the increase in scams by the Corporations the Courts with a
view to cease them lift the corporate purdah during the execution
proceeding in order to ensure that the faith of the business
communities do not destabilize from the judiciary. However, yet a
new set of law is required to deal with offences committed under
the shield of corporate personality.

Footnotes

1. Salomon v A Salomon and Co Ltd [1897] AC
22

2. Delhi Development Authority v Skipper
Construction (1996) 4 SCC 622

3. Ben Hashem v. Ali Shayif, 2008 EWHC 2380
(Fam)

4. Rakesh Mahajan vs. State of U.P. & Ors.
[December 04, 2019]

5. Shri Ambica Mills Ltd. Re [1986] 59 Compcas 368
(Guj.)

6. VTB Capital vs Nutritek

7. Review Petition No. 506/2011 in Execution
Petition No. 38/1998

8. CR No. 3991 of 2013

9. [2017] 201 CompCas 46 (Bom)

10. 2020 SCC OnLine Bom 217.

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