FROM SALOMON TO SATYAM : THE EVOLUTION OF CORPORATE VEIL DOCTRINE IN INDIA” INTRODUCTION

India’s rapid economic development and globalization have resulted in inflows of foreign investments in a variety of forms, subsidiary, merger, or venture. India allows nonresidents to act as the directors of Indian companies in order to attract global investments. However, foreign investors should not forget the unique legal structure and economic system of the country, such as its corporate veil lifting principle. This is a concept recognized worldwide and in countries such as Japan and Korea, whereby a court or statute may disregard the separate legal identity of a company to bring its shareholders, beneficial owners, or directors personally liable.

The landmark case of Salomon v. A. Salomon established that a company is a distinct legal entity from its members, with rights and obligations of its own. This principle is incorporated in Section 9 of the Companies Act, 2013, which gives companies characteristics such as perpetual succession, the right to hold property, and the capacity to sue or be sued in their name. This was subsequently vindicated by the Supreme Court of India in the case of Bacha F. Guzdar v. CIT, Bombay that recognizes the juristic personality of the company to be different from its shareholders. The same is known as corporate veil, that protects the interest of owners and officers.

The Companies Act 2013 contains provisions specifically allowing piercing into the corporate veil when fraud/malfeasance is part of the motive so accountability can be meted out. Such provisions bestow powers on the authorities to get beyond the independent legal person of the company and reach at the individuals responsible for improper acts and deeds.

However, The Companies Act, 2013 explicitly provides for situations where the corporate veil may be lifted in order to highlight the legislative intent not to allow the abuse of the corporate structure and have people made accountable when the corporate entity is being used as a shield for some wrongful activity.

Courts have established various grounds for lifting the corporate veil, including fraud, improper conduct, conflicts with public policy, enemy character, tax evasion, avoidance of welfare legislation, and sham companies. In Jones v. Lipman (1962), the company was deemed a sham when it was used to evade a land sale agreement, leading the court to enforce the contract against the individual. Similarly, in Connors Bros. v. Connors (1940) and Daimler Co. Ltd. v. Continental Tyre & Rubber Co. (1916), companies were treated as enemy entities during wartime due to their controllers’ affiliations with hostile nations. In Sir Dinshaw Maneckjee Petit (1927),the court ignored corporate entities used solely to evade taxes. The avoidance of welfare legislation was highlighted in Workmen Employed in Associated Rubber Industries v. Associated Rubber Industries (1986), where a subsidiary was used to split profits and reduce bonuses, prompting the court to include its income in the parent company’s profits. Lastly, in Gilford Motor Co. Ltd. v. Horne (1933), the court pierced the veil of a company created to breach a non-compete agreement, identifying it as a façade. These caselaws demonstrate the courts’ proactive approach to prevent the misuse of corporate entities.

KEY LEGAL PROVISIONS ON LIFTING UP OF THE CORPORATE VEIL

1. Section 339: Liability for Frauds of Conduct in Winding Up – In the course of winding up a company, the NCLT may render persons liable who carry on business with intent to defraud creditors or for any fraudulent purpose.

2. Section 7(7): Punishment for incorporation using false information.

3. Section 251(1): Liability for fraudulent application for removal of the company’s name from the register.

4. Section 216: Investigation of Ownership –The Central Government may appoint inspectors to investigate and report on:

– Who have an interest in the failure or success of the company.  Such persons who control or influence the policy of the company.   Such persons who have a beneficial interest in the company.

5. Sections 210 and 212: Investigating Powers – Empower the Central Government to appoint inspectors for detailed investigations into a company’s operations and activities to detect fraudulent behavior or misconduct.

EVOLUTION OF THE CORPORATE VEIL IN FOREIGN JURISDICTIONS

This doctrine of lifting the corporate veil that originated from Salomon v. A Salomon and Co. Ltd. has been borrowed and developed in several foreign jurisdictions to avoid misuse of corporate structure. U.S. courts pierce the corporate veil for fraud, undercapitalization, or when corporate form is used to avoid legal obligations as in the case of United States v. Milwaukee Refrigerator Transit Co.

Similarly, Australian courts have followed the trend of applying the doctrine in circumstances of fraud or impropriety. What is common in each jurisdiction is that the court lifts the veil to hold persons liable where the company has been used as a shield to perpetuate injustice or fraud. In Canada, the courts used this doctrine in the case of fraud or where the company is a facade, as held in Clarkson Co. Ltd. v. Zhelka.

JUDICIAL APPROACH OF INDIAN COURTS:

Indian courts have applied the doctrine of lifting the corporate veil in a variety of contexts beyond punishing wrongdoers. For example, in Prem Lata Bhatia v. Union of India, the Delhi High Court held that transferring rented premises from a sole proprietorship to a private company did not warrant eviction, for possession effectively remained with the same person. Similarly, in Prasad-Sushee JV v. SingareniCollieries Co. Ltd., the Hyderabad High Court lifted the corporate veil to allow a subsidiary to rely on experience through its parent company in order to qualify for the tender.

Indian courts generally have supported the principle of a company’s separate legal identity vis-à-vis its shareholders and directors but have lifted the corporate veil only when absolutely necessary, as seen in Vodafone International Holdings B.V. v. Union of India & Another.

In the case, Vodafone, being a Netherlands-based company, acquired CGP Investments, a Cayman Islands entity controlled by Hong Kong’s Hutchinson. CGP held a 67% stake in Hutchinson-Essar Ltd., which was Hutchinson’s Indian mobile business. The Indian tax authorities contended that Vodafone should pay 110 billion rupees in taxes because capital gains had been made in India by Hutchinson. The Bombay High Court decided in favor of the tax authorities, but the Supreme Court, in its pro-business approach, ruled that the corporate veil should not be lifted in cross-border transactions involving tax issues, which is a clear precedent.

The Delhi High Court in J.B. Exports Ltd. v. BSES Rajdhani Power Ltd. has treated a parent company and its subsidiary as one unit to exempt sub-letting charges. Still, the corporate veil can still be pierced by arbitral tribunals. While the Delhi High Court in Sudhir Gopi v. IGNOU and the Bombay High Court in NOD Bearings v. Bhairav Bearing Corporation held that arbitral tribunals cannot lift the corporate veil. The case of UP v. Renusagar Power Company, a decision by the Supreme Court, was an exception. Therein, it held that Hindalco Ltd. was entitled to claim relief of reduced electricity duty available under the Uttar Pradesh Electricity Duty Act since it treated Hindalco and Renusagar Ltd., wholly owned by the former, as having “inextricable umbilical relations.”. This case is an example of the court lifting the veil for the advantage of a company. The Gujarat High Court in IMC Ltd. v. Board of Trustees of Deendayal upheld their authority to do so under the doctrine of alter ego.

The principle of separate legal identity of a company has been well accepted in common law jurisdictions, including India. The Supreme Court upheld this principle but recognized exceptions in L.I.C. India v. Escorts Ltd. & Others (LIC Case), where the corporate personality could be disregarded. The court can pierce the corporate veil when members abuse the corporate structure for fraudulent or improper purposes, and thus, the actual wrongdoer can be identified and dealt with under the law. In this way, mischief or fraud doers are dealt with appropriately.In GMR Energy v. Doosan Power Systems, the Delhi High Court allowed lifting the veil in non-fraud cases, differing from earlier judgments. Such conflicting judgments call for clarity from the Supreme Court on the scope of this doctrine in arbitration.

The LLP Act, 2008 grants LLPs separate legal existence but doesn’t apply the piercing of the corporate veil doctrine. However, Section 30 holds partners personally liable for fraudulent acts, including defrauding creditors.

THE SATYAM SCAM: A TURNING POINT IN THE EVOLUTION OF THE CORPORATE VEIL DOCTRINE IN INDIA

Satyam scam is one of the biggest scandals a business in India has ever suffered through. It was discovered that the Satyam Computer Services, which was once considered India’s most dominant IT firm, had manipulated several financial documents. This showed that company promoters abused the corporate veil or legal doctrine separating company assets and liabilities from directors and shareholders to hide fraudulent dealings where they deceived the public as well as investors.

The scam came into limelight when the then-chairman Ramalinga Raju, while admitting to fabricating records and underreporting cash reserves to inflate the balance sheet to over ₹7,000 crores in 2009, revealed to everyone that the misuse of the corporate veil had highlighted a great need for accountability, transparency, and stronger corporate governance procedures.

Though the principle of separate legal identity, which has emerged in Salomon v. Salomon & Co. Ltd., provides the independence of the company from the shareholders to act independently, Satyam’s case misutilized the concept for the hiding of fraudulent transactions. On the basis of this understanding, when analyzing the Satyam scam, one could note that the corporate veil doctrine evolved over time. Evolution of such malfeasance, especially when business is exploited for the purpose of committing fraud or committing any other wrongs, has led to the development of Indian judicial procedures like *piercing of the corporate veil*.

The truth is that in the Satyam case, courts and other regulatory agencies “pierced” the corporate veil, making those responsible for the fraud, including Ramalinga Raju, personally liable. The Satyam affair marked a sea change in Indian corporate law by the introduction of more stringent rules and the execution of the Companies (Amendment) Act, 2013, aimed at further improvement in corporate governance.

The Indian judiciary has played a vital role in corporate fraud cases where it has effectively lifted the corporate veil that ensured accountability. A classic example is the Satyam scam, which vividly depicts how the courts addressed the misutilization of the corporate veil by making individuals answerable for their acts.

Thus, by piercing the veil, the courts showed that legal entities should not be used to give protection to wrongdoers. Through such actions, the courts have reinforced the principles of justice, transparency, and corporate governance. This evolution of the corporate veil doctrine marks a significant shift in India’s legal landscape, ensuring that the legal separation between a company and its directors cannot be misused for fraudulent purposes. This precedent, as a result of the legal response to the Satyam scam, sets strong roots for the future of corporate malfeasance, with greater regulatory oversight and corporate accountability in India.

The evolution of the corporate veil doctrine, which was demonstrated in the Salomon case, to its use in fraud trials demonstrates a change in the way that people are held accountable for corporate misconduct, safeguarding the interests of investors and society as a whole. The Satyam case would later serve as a significant illustration of how the corporate veil theory might be used when it is abused for evil purposes.

CONCLUSION

The corporate veil lifting doctrine plays a very important role in preventing the misuse of corporate structures and for holding people liable for fraud or other improper conduct. In India, the application has been judicious, making the courts pierce only in exceptional cases where there has been substantial evidence that it is a mere façade to avoid liabilities under the law. This mechanism is therefore crucial in preventing companies from being used as tools for fraud, tax evasion, or any other wrong conduct, holding the individuals behind the company liable for their actions.

Nonetheless, application thereof must be balanced. Its place within justice administration and transparency in the corporate world remains imperative, but its use is hereby curtailed so that this tool will not be taken for granted. The corporate identity of a company shall, at all times, be given respect, and the use of lifting the corporate veil shall remain an exception rather than a course of action when there are ample indications showing definite proof that the corporate entity is being abused.

This doctrine will take the form of a means only of furthering ethical business practices and transparency more powerfully as India continuously modifies its corporate governance body to be more refined. Judges have to exercise this provision very cautiously so that while upholding the principle as a check on companies, they do not whittle away the legitimate rights or protections given to those concerns as it will continue to strike an efficient balance between holding individuals accountable for corporate misconduct and maintaining the integrity of the corporate structure in whole.

Submitted By- Mansi (3rd Year of 5 Year B.A. L.L.B) Academic Year- 2022-2027

(Top 25 Blogs) SYMBIOSIS LAW SCHOOL HYDERABAD, BlogCompetition In India 2024 by The Law Literates 

RANK 4th 

All rights Reserved (The Law Literates)