Introduction
The Companies Act, 2013 provides for the definition of the term Company, under Section 2(20) of the Act as ‘company’ means a company incorporated under this Act or under any previous Company Law. Article 21 of the constitution of India provides a principle that a company has a separate legal personality. According to Professor Haney- “a company is an artificial person created by law, having separate entity, with a perpetual succession and a common seal”. The most important feature of a company is its ‘separate legal entity’ and the ‘limited liability’ of the members or the shareholders of the Company. In the case of Gallagher v. Germania Brewing Company. [1893] 53 MINN. 214, it was held by the court that for a while, by the fiction of law, a corporation is a distinct entity yet in reality, it is an association of persons who are in fact the beneficiaries of the corporate property. Any settled association has its very own legitimate personality, and which is discrete even from the character of its representatives. As clearly an organization itself is definitely not a living body and subsequently, different individuals meet up to work for the name and sake of the organization and they work on behalf or under the name of the company This is what is known as the “Corporate Veil”. The standard of the Corporate veil is a legitimate idea that isolates the character of an enterprise from the characters of its investors and shields them from being and by at risk for the organization’s obligations and different commitments. While an organization is a different lawful element, the way that it can act through human specialists that form it, can’t be disregarded. Since a fake individual is not able to do or is deceitful, the façade of corporate character could need to be taken out to distinguish the people who are truly blameworthy. This is known as the lifting of the corporate cover.
Principle Of Separate Legal Entity
The legitimate limit of the organization is confined or restricted in its degree, both by the objects of the organization and, all the more essentially, by the custom-based regulation, to exercises that are both legitimate and proper to the overall extent of its motivations. Also, inside the extent of its specific items, the organization concurred legitimate limit with respect to restrictive, legally binding and different purposes which is of the very same nature as that moved by the natural persons. This limit is altogether different from, and not got from, or related at all to, the people who at last include the organization’s participation. Thirdly, the actual organization concurred with full and autonomous procedural limits with regard to its members/ shareholders. This is what the Principle of a Separate Legal Entity is.
Doctrine Of Lifting Or Piercing Of Corporate Veil
The Doctrine of Corporate Veil is invoked when shareholders blur the distinction between the corporation and the shareholders or in other words, Under specific dire events and conditions, this corporate cover is eliminated and it is known as the ‘piercing of Corporate Veil’, which empowers the organization to check frauds committed by individuals. Hence, it’s important to be aware exhaustively what the corporate shroud is.
The best advantage of the corporate cloak and separate lawful character of organizations is the legitimate protection it stands to those running the organization. Being securely behind the cloak of fuse, the investors, individuals and overseers of an organization are normally not continued against in the main case, with activities being brought against the organization in its name, except if critical conditions exist to require the lifting of the corporate cover. It is settled that courts might lift or penetrate the corporate cover when conditions so warrant, what is less settled is, whether the equivalent should be possible by an arbitral council.
Other than the legal arrangements for lifting the corporate veil, courts additionally lift the corporate veil to see the genuine or the real situation. Nonetheless, despite the fact that the council and the courts have by and large presently permitted the corporate shroud to be lifted, it ought to be noticed that the principle of the corporate veil is as yet the standard and the cases of lifting or penetrating the cover are the exemptions for this standard.
When Directors And Personnel Are Personally Liable
In certain circumstances, the directors and the personnel working in a company are held to be personally liable for their acts. These circumstances work as an exception to the principle of the corporate veil where the company, being a legal person itself, the directors are not personally held liable or responsible. The circumstances are given below:
- In case of default of Tax liability.
- Any fraudulent activity on the part of the director, as a result of which, the company defaults its debts.
- Where the director has maliciously and fraudulently acted in such a manner which is against the interest of the company.
- Where the director fraudulently carries out the business of the company.
- Fraudulently entering into a Company Contract which is against the interest of the company.
- If the Director has not acquired his or her qualification shares within the prescribed period of time and therefore the company goes into liquidation the day after this era expires, the Director will be called upon by the Official liquidator to pay for the shares he or she was alleged to have purchased.
- Directors of a corporation are personally liable alongside the corporate for repaying the share application money or the surplus share application money received if it is not repaid within the required time period.
The Companies Act 2013 has defined ‘officer in default’, under Section 2(60). It states, “officer who is in default”, for the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise, means any of the following officers of a company, namely:—
whole-time director;
key managerial personnel;
where there is no key managerial personnel, such director or directors as specified by the Board on this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;
any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing, or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default;
any person in accordance with whose advice, directions, or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity;
every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance;
in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars, and merchant bankers to the issue or transfer;
Alter Ego Theory
The theory of Alter Ego in terms of the Corporate veil is a concept of Common Law
In the case of Tesco Supermarket Ltd. V. Nattrass, the court stated, “A corporation is a separate legal entity distinct from its members. It acts through living persons and the persons who acts for the company are not acting as an agent or a servant but are acting as alter ego as they are an embodiment of the company and their mind is the mind of the company. If it is a guilty mind then the guilt is the guilt of the company.”
In the case of International Aircraft Trading Co. v Manufacturers Trust Co., it was laid down, “When a corporation has been so dominated by an individual or another corporation and its separate entity so ignored that it primarily transacts the dominator’s business instead of its own it will be called the individual’s alter ego. Since the business owner and the corporation are alter egos, they are merely two sides of the same coin.”
In the Iridium India Telecom Ltd. V Motorola Incorporation And Others, “The group of the persons guiding and controlling affairs of the company or corporation regarded as alter ego of the company. The criminal intent of the alter ego of the corporation i.e., the person or group of the persons that guide the business of the company would be imputed to the corporation.”
In Standard Chartered Bank and Others V. Directorate of Enforcement and Others, “A company is liable to be prosecuted for the criminal offence although act may be committedthrough its agent.”
Case Laws Related To Corporate Veil
The doctrine of the Corporate veil has significantly emerged through various judicial pronouncements by the courts of India.
Salomon v. A Salomon & Co. Ltd [1897] AC 22 (House of Lords), is a landmark case on the Lifting of Corporate veil. The court pronounced the following:
“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.”
In yet another case of Chloro Controls India Limited v. Seven Trent Water Purification Inc and Ors. (2013) 1 SCC 641, the court stated, “Various legal bases may be applied to bind a nonsignatory to an arbitration agreement:
The first theory is that of implied consent, third-party beneficiaries, guarantors, assignment and other transfer mechanisms of contractual rights. This theory relies on the discernible intentions of the parties and, to a large extent, on the Good faith Principle. They apply to private as well as public legal entities.
The second theory includes the legal doctrines of agent-principle relations, apparent authority, piercing of the veil (also called the alter ego), joint venture relations, succession and estoppel. They do not rely on the parties intention but rather on the force of the applicable law.” It further laid down that “a court can lift the corporate veil, however, the same can be done only in extraordinary circumstances and by following the due adjudicatory process. The Court held that in cases where the corporate façade is used to perpetrate fraud the corporate veil may be lifted by courts.”
Approving the Law as stated by Palmer and Gower, the court, in the case of Tata Engineering and Locomotive Company Ltd. V. State of Bihar, (1964) (6) S.C.R 885 laid down, ”However, in the course of time, the doctrine that the corporation or a company as a legal and separate entity of its own has been subjected to certain exceptions by the application of the fiction that the veil of the corporation can be lifted and its face examined in substance. The doctrine of the lifting of the veil thus marks the change in the attitude that law had originally adopted towards the concept of the separate entity or personality of the corporation. As a result of the impact of the complexity of the economic factors, judicial decisions have sometimes recognised exceptions to the rule about the juristic personality of the corporation. It may be that in course of time, these exceptions may grow in number and to meet the requirements of different economic problems, the theory about the personality of the corporation may be confined more and more. Gower has classified seven strategies of cases where the wheel of the corporate body has been lifted. But it would not be possible to evolve a rational consistent and inflexible principle which can be invoked in detrermin9ing the question as to whether the veil of a corporation should be lifted or not. Broadly, where a fraud is intended to be prevented, or trading with an enemy is sought to be defeated, the veil of the corporation is lifted by judicial decisions and the shareholders are attained to be “persons who actually work for the corporation.”
Veil Of Incorporation and Arbitral Tribunal
As has been stated that lifting up of the veil of the corporation is an exception which must be applied cautiously, the courts have time and again dealt with the question that whether an Arbitral Tribunal has the right to lift up the veil of incorporation.
In Sudhir Gopi vs Indira Gandhi National Open University, the court laid down,
“The jurisdiction of the arbitrator is circumscribed by the agreement between the parties and it is obvious that such limited jurisdiction cannot be used to bring within its ambit, persons that are outside the circle of consent. The arbitral tribunal, being a creature of limited jurisdiction, has no power to extend the scope of the arbitral proceedings to include persons who have not consented to arbitrate. Thus, an arbitrator would not have the power to pierce the corporate veil so as to bind other parties who have not agreed to arbitrate.”
“An arbitral tribunal has no jurisdiction to lift the corporate veil; its jurisdiction is confined by the arbitration agreement – which includes the parties to arbitration – and it would not be permissible for the arbitral tribunal to expand or extend the same to other persons. There is no quarrel with the proposition that a court could, in given cases, lift the corporate veil. This decision is not an authority for the proposition that such power could be exercised by an arbitral tribunal.”
In the case of NOD Bearings Pvt. Ltd. v. Bhairav bearing Corporation (2019) SCC OnLine Bom 366, it was stated by the court that, “This (Lifting of Corporate Veil), I am afraid, is not permissible to an arbitral forum. It may be appropriate in a given case for a court of plenary jurisdiction to lift the corporate veil and find out the true perpetrator of the act and hold him responsible for its consequences. Even in such a case, lifting of a veil can only occur in certain specified circumstances, particularly, where a question of fraud is involved and it is necessary to ascertain who the real perpetrator of the fraud was. Other cases where the corporate veil has been lifted on judicial grounds have been to detect the enemy character of a company in times of war, to find out the substance of a transaction involving tax evasion or economic offences or other improper conduct or improper purpose. An arbitral forum, on the other hand, is bound by the contract of the parties, which creates it and the terms of submission through which the reference is made to it. Third parties, who are not parties to the contract, the arbitration agreement being a part of such contract, cannot be either arraigned to a cause or made liable for the same. In Sudhir Gopi Vs. Indira Gandhi National Open University, Delhi High Court has held that an arbitral tribunal has no power to lift the corporate veil. Only a court has the power to lift the corporate veil of a company if a strong case is made out. The mere fact that a party is an alter ego of another would not predicate an agreement to refer the disputes to arbitration by that party under an arbitration agreement of the other. The corporate veil cannot by that reason alone be lifted so as to make a party, who was not a party to an arbitration agreement, a party to the reference.”
The Court held that an arbitral tribunal’s jurisdiction rests on the agreement between the parties and cannot proceed against non-signatories to the arbitration agreement. The Court also held that an arbitral award made against non-signatories would be “wholly without jurisdiction and unenforceable”
I.M.C. Ltd. v. Board of Trustees of Deendayal Port Trust and Ors., (2019) 3GLR 1798
“There is nothing in law which prohibits an Arbitral Tribunal from lifting the corporate veil on the basis of the doctrine of alter ego. The Arbitral Tribunal has a right to take up all disputes which a Court can undertake, except certain disputes generally treated as non-arbitrable, viz. (i) patent, trademarks and copyright, (ii) anti-trust/ competition laws, (iii) insolvency/ winding up, (iv) bribery/ corruption, (v) fraud, (vi) criminal matters. The Arbitration and Conciliation Act, 1996, does not make any provision excluding any category of disputes treating them as non-arbitrable but the Courts have held that certain kinds of disputes may not be capable of adjudication through means of arbitration.”
Argentium International Pvt. Ltd. v UTM Engineering Pvt. Ltd., IB No. 248/ND/2019
“Tribunal is also not denuded of authority to pierce the ‘corporate veil’ to ascertain the real successful bidder. Therefore, the ‘Corporate Veil’ has to be lifted to prevent unjust and fraudulent act of the respondent herein and in order to look-into realities behind the legal façade and to hold him liable to the acts of the Corporate Debtor. No doubt, the separate personality of the company is statutory privilege, but it must be used for legitimate purpose only. Whenever & wherever, if fraudulent or dishonest use is made of the legal entity, the individual will not be allowed to hide behind the curtain of the corporate personality. A duty is cast upon the Tribunal or the Court to break this shell of the company and to see who is actually benefitted by this curtain.”
Therefore, from the above case laws, it can be said that there is no certainty whether an Arbitral Tribunal has the power to lift up the corporate veil.
Conclusion
Conclusively, it can be stated that the Doctrine of lifting up or the piercing of the veil of incorporation is a very significant part of Corporate Law, not only in India but in corporations of most countries. It is a great example of fictional law. But, as this is a very old doctrine, it also requires changes like any other law, in order to tackle the present-day problems of corporations. The judiciary and the legislature need to make the law more unambiguous.
This article is written and submitted by Varsha Kumari Mishra during her course of internship at B&B Associates LLP. Varsha is a law student from Law College Dehradun, Uttaranchal University.
