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Piercing of the Corporate Veil in India: When the Corporate Mask Slips

  • 6 hours ago
  • 9 min read

 

Introduction


One of the most basic tenets of corporate law is the doctrine of separate legal personality. It acknowledges that a company is a legal person that is separate and independent of shareholders and directors. Although this principle promotes investment and prevents excessive liability, it may be also abused to avoid personal responsibility. In response to this abuse, the courts came up with the concept of piercing the corporate veil, which permits the court to lift the veil of incorporation to examine the fraudulent and criminal actions of the company in which the veil is incorporated.


The discussion has over time evolved to encompass the concept of reverse piercing of the corporate veil in which the corporate assets can be subjected to personal acts of those individuals who control the corporate structure where the corporate structure is being used to cover the liability. Even though the concept of reverse piercing is yet to be formally recognised by the Indian courts as a separate theory, there are a number of cases in which judicial rationale can be traced to the same principles. Since corporate structures are becoming more complicated, it is necessary to investigate the role of Indian jurisprudence in veil piercing to comprehend the balance between corporate independence and legal responsibility.


Corporate law frequently starts with one of the most beautiful legal concepts ever designed: the concept that a company is a person before the law. This idea is something that was always fascinating and somewhat surreal as a person who was studying corporate law. The law simply creates the illusion of placing a fictitious entity in ownership of property, liabilities, and contracts and subject to litigation as a human being after all. This separate legal personality doctrine was well established in the case of Salomon v. A.Salomon and Co. Ltd. in which the House of Lords ruled that a company after incorporation was a legal entity independent of the persons who established it[1].


The company does not consist of its shareholders, but it is a separate legal person. Later this principle was reaffirmed in Lee v. Lee. In the case of Lee, Air Farming Ltd. where the Court established that a controlling shareholder could be even an employee of the company that he had incorporated, since the corporation had personality independent of its members. This principle in India functions through the context of the Companies Act, 2013, to influence the manner in which business is created, managed and controlled[2].



On the surface, the doctrine looks like it is deceptively straightforward: the company does it, and the people behind it go scot-free. But, now being aware after learning about corporate law, the apparent simplicity of the doctrine can usually hide a significantly more complex fact. Corporate structures may get so complex and sometimes they are applied in a manner that challenges the legal fiction itself. To a large extent, the corporate personality doctrine reminds one of movies where characters take a disguise in the form of a fancy personality to hide their real intentions. Indicatively, in Catch Me If You Can, the protagonist lives by adopting new personalities several times, to traverse systems that ensure that order and trust prevail. The corporate veil works in a slightly similar way: it is a valid structure of business and investment, but when abused, it may be an easy to use cover. In realising such a possibility, courts came up with the concept known as the doctrine of lifting or piercing the corporate veil. This doctrine provides that the court can lift the veil of incorporation and peer through the corporate entity when the corporate entity has been utilized to commit fraud, avoid taxes, or otherwise avail itself of the statute[3].


This doctrine has been used in many cases that have been handled by Indian courts such as Life Insurance Corporation of India v. Escorts Ltd., Delhi Development Authority, Skipper Construction Co. (P) Ltd. These examples show that corporate personality is held in high regard, but it is not absolute. Once the corporate form has become a deceptive instrument, there is no law that is not ready to interfere[4].


The classic veil piercing has typically a single direction meaning that courts understand that the shareholders are personally liable to the company. But corporate ingenuity has made sure that the story is not that even on very few occasions. With time, scholars and courts started addressing the cases of people committing the reverse and that is to use corporations to conceal personal assets in order to avoid liability. At this point, we have the element of reverse piercing of the corporate veil in play. The essence of reverse piercing is to reverse the historical doctrine. As opposed to the position of holding the shareholders liable to the debts of the company, courts deem the corporate assets of the controlling shareholder where the company is just a tool to bury individual wealth[5].


The initial time when one heard about the concept of reverse piercing, they would’ve thought that it was the time when a corporate law became less about a set of rules and more about a puzzle. The doctrine compels a court to pose a challenging issue; whether a person is utilizing a firm as his own wallet, then must the law go on to assume that the firm is independent? The solution is, as is usual, not always simple. Corporate law has to juggle opposing interests, on the one hand, the desire to avoid misuse of the corporate form and on the other, the need to maintain predictability which businesses are drawing upon.


Interestingly, reverse piercing is not actually a doctrine that has been recognised by Indian jurisprudence, but the rationale behind this doctrine is found in various judicial cases. As an example, in State of Rajasthan v. The Supreme Court reviewed the case of corporate restructuring of Gotan Lime Stone Khanij Udyog Pvt. Ltd. which seemed to be a way of bypassing mining laws[6]. The Court had to investigate further and unearth the real parties that were involved in the transaction. Equally, in Balwant Rai Saluja v. The Supreme Court stressed that the corporate veil can be lifted in situations when the company is only a mask that covers the actual reality in Air India Ltd. These rulings, though usually described as traditional veil lifting, are indicative of a more general judicial disposition to accept a more focus on substance over form[7].


Such flexibility is even more necessitated by the fact that today corporate structures are highly complex. Businesses are not often solitary entities, but are frequently found being part of elaborate webs of an assortment of holding corporations, subsidiaries and special purpose vehicles. These arrangements may have perfectly legitimate purposes, e.g. risk management or structure of investment. However, they also have the ability to provide people with chances to hide the ownership and control. Sometimes, the structures are nearly cinematic in their richness layer upon layers, as the dream levels were in Inception. The layers are different, however, in the end, they all refer to the same reality.


Reverse piercing is especially applicable where persons have personal assets transferred to closely controlled companies to protect them against creditors or legal claims. Had the law strictly followed the corporate personality in such a situation, it would have been easy to escape responsibility and still possess the ownership of wealth. The fact that the corporate form is ignored in these limited cases by allowing courts to do so helps to avoid such an outcome. Simultaneously, the doctrine should be used carefully. Reverse piercing can have an impact on innocent shareholders or corporate creditors who reasoned on a separate status of the company, unlike the traditional veil piercing[8]. The courts need to be very keen to determine whether the corporation is indeed the alter ego of the individual and whether the failure to treat the corporate form will harm the third parties unduly.


In a more general sense, the controversy over reverse piercing is a timeless conflict in corporate law, the gravitas between the law and fair justice. The separation-of-persona doctrine is never going to be done away with in contemporary trade. It is essential to the risk that entrepreneurship and investment would otherwise be exposed to. The principle is however not supposed to be left to operate as an impassable barrier against accountability. The corporate form should not be turned into a fraud or law-dodging tool as it was noted in different veil-lifting cases by the Supreme Court.


Conclusion


The corporate form was not established to allow individuals to breach the responsibility as it was initially meant to facilitate business activity. With the ever-complicated nature of the corporate structures, the courts may be called upon to redefine the current doctrines, so that the law can be up to date with these changes. In that very regard, reverse piercing does not harm the doctrine of separate personality, on the contrary, it serves to support the purpose behind it, to thwart its abuse.


Finally, the tale of reverse piercing of the corporate veil is a lesson that corporate law is not only about very strict legal formations, it is about being fair in these legal formations. The corporate veil just like a well built disguise in a movie like The Dark Knight can be a good thing. However, once the disguise starts serving to hide injustice, instead of allowing lawful operation, the law should be prepared to do away with it. Reverse piercing is an example of how courts can reach this balance, such that the corporate mask is not a means to commit wrongs but a means of trade.


Author: Anannya Mohanty, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

 

References

  1. Lon L. Fuller, Legal Fictions, 25 Ill. L. Rev. 363 (1930).

  2. Salomon v. A. Salomon & Co. Ltd., A.C. 22 (H.L.).

  3. Lee v. Lee’s Air Farming Ltd., A.C. 12 (P.C.).

  4. Macaura v. N. Assurance Co. Ltd., A.C. 619 (H.L.).

  5. Companies Act, 2013, No. 18, §§ 2(20), 3, 7, 9 (India).

  6. Life Ins. Corp. of India v. Escorts Ltd., (1986) 1 S.C.C. 264 (India).

  7. Delhi Dev. Auth. v. Skipper Constr. Co. (P) Ltd., (1996) 4 S.C.C. 622 (India).

  8. Workmen Employed in Associated Rubber Indus. Ltd. v. Associated Rubber Indus. Ltd., (1986) 4 S.C.C. 36 (India).

  9. New Horizons Ltd. v. Union of India, (1997) 1 S.C.C. 478 (India).

  10. Juggilal Kamlapat v. Comm’r of Income Tax, (1969) 1 S.C.C. 661 (India).

  11. State of U.P. v. Renusagar Power Co., (1988) 4 S.C.C. 59 (India).

  12. Gilford Motor Co. Ltd. v. Horne, Ch. 935 (C.A.).

  13. Jones v. Lipman, 1 W.L.R. 832 (Eng.).

  14. C.F. Tr., Inc. v. First Flight Ltd. P’ship, 140 F. Supp. 2d 628 (E.D. Va. 2001), aff’d, 306 F.3d 126 (4th Cir. 2002).

  15. Gregory S. Crespi, The Reverse Pierce Doctrine: Applying Appropriate Standards, 16 J. Corp. L. 33 (1990).

  16. State of Rajasthan v. Gotan Lime Stone Khanij Udyog (P) Ltd., (2016) 4 S.C.C. 469 (India).

  17. Balwant Rai Saluja v. Air India Ltd., (2014) 9 S.C.C. 407 (India).

  18. Vodafone Int’l Holdings B.V. v. Union of India, (2012) 6 S.C.C. 613 (India).

  19. BSN (UK) Ltd. v. Janardan Mohandas Rajan Pillai, (2001) 1 Comp. L.J. 216 (Bom. H.C.) (India).

  20. LFC Mktg. Grp., Inc. v. Loomis, 8 P.3d 841 (Nev. 2000).

  21. In re Phillips, 139 P.3d 639 (Colo. 2006) (en banc).

  22. Postal Instant Press, Inc. v. Kaswa Corp., 77 Cal. Rptr. 3d 96 (Ct. App. 2008).

  23. Standard Chartered Bank v. Andhra Bank Fin. Servs. Ltd., (1993) 2 Comp. L.J. 22 (Bom. H.C.) (India).

  24. ArcelorMittal India (P) Ltd. v. Satish Kumar Gupta, (2019) 2 S.C.C. 1 (India).

  25. Insolvency and Bankruptcy Code, 2016, No. 31, §§ 66, 69, 70 (India).

  26. Peter B. Oh, Veil-Piercing, 89 Tex. L. Rev. 81 (2010).

  27. Paul L. Davies & Sarah Worthington, Gower Principles of Modern Company Law (11th ed. 2022).

  28. Avtar Singh, Company Law (Eastern Book Co., latest ed.).

  29. K.R. Chandratre, Company Law (Bharat Law House, latest ed.).

 


[1] Lon L. Fuller, Legal Fictions, 25 Ill. L. Rev. 363, 364–65 (1930); Salomon v. A. Salomon & Co. Ltd., A.C. 22 (H.L.)

[2] Macaura v. N. Assurance Co. Ltd., A.C. 619 (H.L.); Companies Act, 2013, No. 18, §§ 2(20), 3, 7, 9 (India); Lee v. Lee's Air Farming Ltd., A.C. 12 (P.C.)

[3] Life Ins. Corp. of India v. Escorts Ltd., (1986) 1 S.C.C. 264, 293 (India)

[4] Life Ins. Corp. of India v. Escorts Ltd., (1986) 1 S.C.C. 264 (India) ; Delhi Dev. Auth. v. Skipper Constr. Co. (P) Ltd., (1996) 4 S.C.C. 622 (India); Workmen Employed in Associated Rubber Indus. Ltd. v. Associated Rubber Indus. Ltd., (1986) 4 S.C.C. 36 (India); New Horizons Ltd. v. Union of India, (1997) 1 S.C.C. 478 (India); Juggilal Kamlapat v. Comm'r of Income Tax, (1969) 1 S.C.C. 661 (India); State of U.P. v. Renusagar Power Co., (1988) 4 S.C.C. 59 (India); Gilford Motor Co. v. Horne, Ch. 935 (C.A.); Jones v. Lipman, 1 W.L.R. 832 (Eng.)

[5] C.F. Tr. Inc. v. First Flight Ltd. P’ship, 140 F. Supp. 2d 628, 640 (E.D. Va. 2001), aff’d, 306 F.3d 126 (4th Cir. 2002); Gregory S. Crespi, The Reverse Pierce Doctrine: Applying Appropriate Standards, 16 J. Corp. L. 33, 35–36 (1990)

[6] State of Rajasthan v. Gotan Lime Stone Khanij Udyog (P) Ltd., (2016) 4 S.C.C. 469 (India); Balwant Rai Saluja v. Air India Ltd., (2014) 9 S.C.C. 407 (India)

[7] Vodafone Int’l Holdings B.V. v. Union of India, (2012) 6 S.C.C. 613 (India); BSN (UK) Ltd. v. Janardan Mohandas Rajan Pillai, (2001) 1 Comp. L.J. 216 (Bom. H.C.) (India)

[8] Postal Instant Press, Inc. v. Kaswa Corp., 77 Cal. Rptr. 3d 96, 104–05 (Ct. App. 2008)

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