THE LAW ON LIFTING OF THE CORPORATE VEIL.

The law on lifting of corporate veil and how directors of a company can be made liable for prosecution in the court of law. 

Black Law's Dictionary defines lifting of corporate veil “the judicial act of imposing personal liability on otherwise immune corporate officers, directors, or shareholders for the corporation’s wrongful acts”

It is a well settled law that the director of a company cannot be solely liable for the affairs of the company and cannot be personally prosecuted under law but there have been many instances where the Directors can be held personally liable if acted in a personal capacity. This small research emulates the precedents that have weighted the circumstances of how the Directors can be held liable before the court of law.

WHEN THE DIRECTORS HAVE ACTED IN THE CAPACITY OF THE DIRECTORS OF A COMPANY, THEY CANNOT BE HELD PERSONALLY LIABLE WHEN THERE EXITS NO ARBITRATION AGREEMENT BETWEEN THEM AND THE OPPOSITE PARTY.

a) Deutsche Post Bank Home Finance Ltd. v. Taduri Sridhar, (2011) 11 SCC 375.

b) Jagdish Chander v. Ramesh Chander, (2007) 5 SCC 719.

c) Yogi Agarwal v. Inspiration Clothes & U, (2009) 1 SCC 372.

d) S.N. Prasad v. Monnet Finance Ltd., (2011) 1 SCC 320.

 

An Agent Cannot Be Sued When The Principal Had Been Disclosed Subject To The Contract To The Contrary. (Vivek Automobiles Ltd. v. Indian Inc., (2009) 17 SCC 657, (Para 24), ACE Innovators (P) Ltd. v. Hewlett Packard India Sales (P) Ltd., 2013 SCC OnLine Del 4019)

A COMPANY IS NOT IN LAW, THE AGENT OF THE SUBSCRIBERS OR TRUSTEE FOR THEM:

The company is at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by that Act. (Salomon v. Salomon & Co. Ltd. 1897 AC 22,)

 THE CMD WHO SIGNED AN AGREEMENT WITH THE RESPONDENT COMPANY BEING MD OF THE COMPANY, WAS MADE AS A PARTY TO ARBITRATION PROCEEDINGS, 

It was held that since CMD is already participating in the proceedings as a.r. of the company no prejudice is going to cause to him by participating in the arbitration proceedings as one of the respondent.(Ramkrishna verma v. Excel Agri business 2023 SCC Online MP 1164 (Para 3&6)

CIRCUMSTANCES IN WHICH THE DIRECTOR OR DIRECTORS OF A COMPANY MAKE THEMSELVES PERSONALY LIABLLE

A company incorporated under the Companies Act is a juristic entity. The decisions of the Company are taken by the Board of Directors of a Company. An individual Director cannot don the mantle of the Company by acting on its behalf, unless he is so authorized to act by a special resolution passed by the Board or unless the Articles of Association so warrant. A Director of a Company though he owes a fiduciary duty to the Company, owes no contractual duty qua third parties. There are, however, two exceptions to this rule:

I. The first is where the Director or Directors make themselves personally liable, i.e., by execution of personal guarantees, indemnities, etc.

II. The second is where a Director induces a third party to act to his detriment by advancing a loan or money to the Company. On the third party proving such fraudulent misrepresentation, a Director may be held personally liable to the said third party.

(Mukesh Hans v. Uma Bhasin 2010 SCC OnLine Del 2776 (PARA 11).

This liability would not flow from a contract, but would flow in an action at tort, the tort being of misrepresentation and of inducing the third party to act to his detriment and to part with money. The directors will be personally liable to the third parties in cases where they have made themselves personally liable by way of guarantee, indemnity, etc.or where they have been guilty of tort towards those to whom they owe a duty of care and discharge fiduciary obligations. For example by making false representations about a company, a director induces a third party to advance a loan to the company. On proof of fraudulent misrepresentation, a director may be personally liable to the third party. This liability would flow in an action at tort and not from a contract.

(Tristar Consultants vs Customer Services India Pvt Ltd & Anr 139 (2007) DLT 688. (Para 28-30)

WHEN THE DOCTRINE OF THE LIFTING OF THE CORPORATE  VEIL WOULD BE APPLIED.

The company is distinct from its shareholders and its directors. Neither the shareholders nor the director can treat the companies assets as their own. Directors of a company are liable for misappropriation of company's funds and other misfeasance, but not for an ordinary contractual liability of the company. The liability of the members or the shareholders or the directors is limited to the capital invested by them.

The doctrine of lifting of the corporate veil could be applied in cases of tax evasion, or to circumvent tax obligation or to perpetuate fraud or trading with an enemy are concerned. (Space Enterprises v. M/s. Srinivasa Enterprises Ltd. 72 (1998) DLT 666, (Para 11)

By the process, commonly described as “lifting the veil”, the law either goes behind the corporate personality to the individual members or ignores the separate personality of each company in favor of the economic entity constituted by a group of associated companies. This course is adopted when it is found that the principle of corporate personality is too flagrantly opposed to justice, convenience or the interest of the Revenue. When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. (New Horizons Ltd. v. Union of India: (1995) 1 SCC 478 : (Para 27))

Where the plaintiff was sought to be defrauded of the amount of Rs. 15 lakhs under the cloak of corporate entity of defendant No. 1 company, such corporate veil must be lifted taking into consideration the fact that defendant No. 1 company was Only a family arrangement of the remaining defendants. (Autocop (India) (P) Ltd. v. S. Savinay Impex (P) Ltd., 2006 SCC OnLine Del 961 : ILR (2006) 2 Del 665 (Para 11), Saurabh Exports v. Blaze Finlease and Credits Pvt. Ltd., 129 (2006) Delhi Law Times 429)

A Transaction Of Sale Of The Property Of The Company In Favor Of Wives Of The Director Was Found To Be Shame And Collusive And As Such It Was Held That Piercing Of The Veil Of An Incorporation To Ascertian The True Nature Of The Transaction Will Be Justified. (Subra mukherjee &Anr vs Bharat Cooking Coal. 2000 3 SCC Online SC 312. (Para 11)

LIFTING OF CORPORATE VEIL IS ESSENTIAL FOR THE PURPOSE OF DETERMING THE PERSONS WHO ARE LIABLE FOR ANY FRADULENT OR UNLAWFULL PRACTICE.

a) Red Zebra Gift Promotion Pvt. Ltd. v. Pournavi Events Pvt. Ltd. 2012 SCC OnLine Del 4136 (Para 4)

b) TATA ENGEENEERING AND LOCOMOTIVE CO (1964) 34 COMP CAS 458 (SC)

c) DDA VS SKIPPER CONSTRUCTIONS (1996) 4 SCC 622

d) SINGER INDIAN VS CHANDER MOHAN CHANDA & ORS (2004) 7 SCC

THE DIRECTOR OF A COMPANY CANNOT BE MADE A PARTY IN AN ARBITRATION PROCEEDINGS IN BETWEEN THE COMPANY AND A THIRD PARTY.

Managing Director Signing Lease Agreement In The Capcity Of Managing Director Of The Comptny On Behalf Of The Company Cannot Be Made a Party In Arbitration As There Was No Arbitration Agreement Between Him And The Lessor. (Prakash industries vs. Space capitals service limited 2016 SCC online Del 6140 (Para 15,16) When there is no assertion that the appellant had extended any contract of guarantee or had even undertaken to make payment to the respondents of the loan amount on behalf of the company, No case of joint and several liability is made out against the director only because he resigned as a director of the company. (Mukesh Hans v. Uma Bhasin 2010 SCC OnLine Del 2776 (Para 18)