Societal Impact As A Criterion Piercing The Veil
Author: LawSphereX
Category: General Law
Published:
Updated:
SOCIETAL IMPACT AS A CRITERION PIERCING THE
VEIL
Samarth Parag Gosavi, BBA. LL.B. (Hons.), Symbiosis Law School, Pune Anushka Maske, BBA. LL.B. (Hons.), Symbiosis Law School, Pune
ABSTRACT
The doctrine of veil piercing is an exception to the concept of separate legal entity of a corporation. The doctrine states that though generally the corporations are distinct legal personalities from its members, certain situations might require to ‘pierce this veil’ which differentiates between the corporation from its members. Such situations arise when corporations are merely instruments used by the members to evading taxes or committing frauds on society. In the light of this, this article analyses the literature which shades light upon the way doctrine is applied in the foreign jurisdictions with respect to aforesaid criterion. The article further explains the Indian judiciary’s approach towards this criterion, which is established to be a little advance than developed democracies like USA and UK, despite having taken inspiration from English cases.
The article also intends to endorse certain recommendations which are already expressed by scholars, in order to improve the application of doctrine even further.
Introduction The concept of separate legal entity of a company is nothing but a distinction between the company and its members. It is generally accepted principle of law that this line of difference should limit the liability of the members, but the courts have refused to recognize this difference in cases of frauds or tax evasion. This practice of courts is nothing but “piercing the veil. ” However, whether to apply the concept of separate legal entity or that of piercing the veil, is difficult for the English courts to decide. 1 Indian courts, despite relying to a great extent on English courts for development of piercing the veil doctrine have not taken such ambiguous approach. However, there is no set of criteria to determine when to pierce the veil and when to not2, thus leaving the question to the discretion of the court, which is not exercised judiciously would be hazardous.
3 Taking this as our backdrop, this article analyses the approach taken by different judiciaries, but emphasizes on that taken by Indian, towards the ‘societal impact’ as a criterion for determining whether to pierce the veil or not. Methodology To a little extent, the author relies on the decided cases, but largely, the present article highly relies on the secondary sources, especially the research articles, which are utilized to shade the light on the views expressed by several scholars, which mirror author’s opinions and even the recommendations. Literature Review In this section author intends to analyse the literature the way doctrine is applied in other jurisdictions to determine the stand of foreign courts with respect to interest of public in piercing the corporate veil.
Stephen Bull4, by analysing the two English cases regarding veil piercing and the two 1 Murray A Pickering, The Company as a Separate Legal Entity, 31 The Modern Law Review 481-511 (1968). 2 Aquib Rouf, The Holistic and Modern Approach of Lifting the Corporate Veil and Its Judicial Interpretation in Present Day Scenario, 4 INT'l J. L. MGMT. & HUMAN. 1440 (2021). 3 Ayushi Kushwaha & Niharika Verma, Beyond the Curtain: Trailing the Judicial Approach on the Lifting of Corporate Veil in India, 4 INT'l J. L. MGMT. & HUMAN. 3117 (2021). 4 Stephen Bull, Piercing the Corporate Veil—in England and Singapore, Singapore Journal of Legal Studies 24-
40 (2014).
Singaporean cases pertaining to same topic, has elaborated the impact of judgments on the application of concept in those respective countries. The author is rightly stated that English courts have been restrictive in their approach whereas Singaporean courts were little more liberal. However, the author has wrongly presumed that the impact of English cases would be seen in the future Singaporean cases, notwithstanding the application of concept by the courts has a significant impact on the public and given the peculiarity of the respective countries’ public policies, courts should not rely completely on the foreign judiciary, and thus English cases may not have significant impact on future Singaporean cases.
This peculiarity of the society which impacts whether the courts would pierce the veil or not was, albeit impliedly, considered by Hui Huang5, while analysing the trend of Chinese courts in adjudicating the veil piercing cases, which shows that the conditions which attract will piercings such as frauds are likely to occur in underdeveloped areas resulting in high ratio of courts in those jurisdictions, piercing the veil. As regards the Australian approach is concerned, courts have considered the fraud over the public at large or society as a criteria requiring to pierce the veil which means the courts have inclined to hold that impact on society while piercing the veil as an important criterion.
6 Even the Malaysian approach had suggested by Berna Collier7, is to purge the corporate veil when it is required for discovering frauds or crimes perpetrated by the owners or members on the company affecting the society at large. In U. S. , different state courts may take different approach, but almost all the state courts have laid down the criteria, most of which relate directly or indirectly to the criteria of impact on society of piercing or not piercing the veil. 8 Thus, the literature on the present topic seems to establish the application of veil piercing doctrine to the benefit of society and thus, application of doctrine may alter according to the peculiarities of each society. Indian Approach
5 Hui Huang, Piercing the Corporate Veil in China: Where Is It Now and Where Is It Heading?, 60 The
American Journal of Comparative Law 743-774 (2012).
6 Piercing Corporate Veil in Australia (2001) 19(4) C&SLJ 250
7 THE APPLICATION OF THE RULE IN SALOMON V SALOMON IN MALAYSIAN COMPANY
LAW [1998] 2 MLJ lxv
8 ARTICLE:DELAWARE LLCs AND VEIL PIERCING: LIMITED LIABILITY HAS ITS LIMITATIONS
Even the Indian courts have followed the similar approach. Agreeing to this approach in ‘Company Law9’ analysing the State Trading Corporation of India v. Commercial Tax Officer10, while agreeing with the court, the authors pointed out that the court was right in dismissing the petition of the companies to pierce the veil. In LIC v. Escorts Ltd. 11, one of the first few cases that dealt with the concept of lifting the wheel the court laid down the criteria to determine in what circumstances the doctrine could be applied. These included fraud, evading taxes, or situations where the associate companies could not be differentiated at all, in nutshell, the cases where public is directly or indirectly affected. The scholars have also opined the same.
Scholars have agreed the significance of considering the impact on the society as a criterion for determining whether to pierce the veil or not. 12 13 The courts have also adopted the principle of doctrine of reverse piercing veil, though not expressly and formally. The concept refers to idea of holding corporations liable for the acts committed by their members or directors, in the course of furthering the interest of the corporations. The concept finds its roots in USA and its application in USA is express, but in India, the courts are applying the concept but not have recognized it formally. 14 As Gautam Bhatia rightly points out, the concept of reverse piercing is still in a nascent stage in India, while in USA it is at the advanced stage, and thus, Indian law requires further clarifications and settlement of legal position in this regard, possibly codification.
15 To a really great extent English courts’ application of doctrine has impact on that of Indian courts. 16 For example, in New Horizons Ltd. v. Union of India17, the case could not be categorized in any of the 11 categories recognized by English law and consequently Delhi High Court refused to apply the doctrine of lifting the veil. However, that has not deterred Indian courts to develop the law further, i. e. , beyond the developments in U. K. Indian courts adopted the concept of ‘enterprise liability’ which imposes even more obligations on the directors or members then the doctrine of veil piercing. The veil piercing doctrine is not adequate to punish
9 R. K Goel, et. al., Company Law, 7 Journal of the Indian Law Institute 497-598 (1965).
10 State Trading Corpn. of India, Ltd. v. CTO, 1963 SCC OnLine SC 3
11 LIC v. Escorts Ltd., (1986) 1 SCC 264
12 Directors' Liability, Including Piercing the Corporate Veil Doctrine, 12 INT'l BUS. LAW. 511 (1984). 13 Siddhartha Sethi, Critical Analysis on Lifting of the Corporate Veil by Judicial Interpretation, 4 INDIAN J.L. & LEGAL RSCH. 1 (2022-2023).
14 Akash Ramdas Nikam, Lifting of Corporate Veil: A Tool to Curb Corporate Abuse, 3 INDIAN J.L. & LEGAL
RSCH. 1 (2021).
15 Gautam Bhaita, Comparative Look at Reverse Piercing of Corporate Veil across Jurisdictions, 3 INDIAN J. INTEGRATED RSCH. L. 1 (2023).
16 P.M Bakshi, Lifting the Corporate Veil, 36 Journal of the Indian Law Institute 383-384 (1993).
17 New Horizons Ltd. v. Union of India, 1993 SCC OnLine Del 564
the MNC’s that create the subsidiaries and subsequently leave the burden on those subsidiaries. Thus, as Abhi Raghunathan18 points out, in the aftermath of Bhopal disaster in the interest of society Indian courts adopted the concept of ‘enterprise liability’ which is still not adopted in what countries has advanced as USA or UK. Despite this, there are certain challenges to the application of veil piercing in India. The first challenge being the imprisonment of the company. A company being an intangible entity, cannot be imposed, and thus, Indian courts have trend of imposing the fine only, when the punishment prescribed under the law is fine along with imprisonment. 19 20 This is, to an extent, resolved. In cases where company can be imprisoned, the court could imprison the members or directors.
But the cases requiring reverse piercing veil doctrine are yet to be resolved in this regard. 21 Recommendations and Conclusion As Tan Cheng-Han recommends, the decision of the court whether to lift the veil or not should depend on the impact of doing so on the society, and courts must avoid usage of vague terms like “sham,” considering the effect of their decisions on public. 22 Indian scholars agree. Geetanjali Sharma & Azal Khan23 point out that it is high time to effectively utilize the power to pierce the veil as regards the corporate criminal liability is concerned, in order to punish the real perpetrators who by their acts have shackled the economics of society.
This approach is taken further by Shreya Suresh24, where she argues that corporations have an enormous impact under society and thus crimes committed in their name by the members should be strictly met with by piercing the veil. Thus, it is recommended that members or directors should not be allowed to shoot in the leg of society keeping the gun on the shoulders of the corporations, and the power to pierce the veil
18 Raghunathan Abhi, The Grand Trunk Road From Salomon to Mehta: Economic Development and Enterprise
Liability in India, 100 GEORGETOWN LAW JOURNAL 571-603 (2012). 19 Lavanaya Ambalkar, Corporate Veil Lifting: Issues and Solutions and Public Policy as a Ground; Tracing the Indian, English and American Jurisprudence, 22 SUPREMO AMICUS [239] (2020).
20 Ajay Bainar & Gourav Gulati, Lifting the Corporate Veil Corporate Criminal Liability, 8 SUPREMO
AMICUS 5 (2018).
21 Masoom Agrawal & Vaidehi Pareek, Piercing through the Corporate Veil, 2 INT'l J.L. MGMT. & HUMAN.
308 (2019).
22 Tan Cheng-Han, Piercing the Separate Personality of the Company: A Matter of Policy?, Singapore Journal of Legal Studies 531-551 (1999).
23 ANALYSIS OF LIABILITY APPROACHES: PROPOSAL OF A REGIME FOR CORPORATE CRIMINAL
OFFENCES IN INDIA 2010 4 MLJ Crl 23.
24 OFFENCES BY AN ENTITY: A SHAREHOLDER’S DILEMMA 2011 3 MLJ Crl 1
should be effectively used to punish such conducts of directors or members. Further, scholars recommend and the author agrees, that doctrine of reverse piercing veil be recognized, to hold liable corporations, for the acts of directors and members committed camouflaging themselves as corporations.25 It could be concluded that the courts across the world have applied the doctrine taking impact on society as a significant criterion. Indian courts have taken a step ahead by applying the doctrine of ‘enterprise liability,’ yet, the Indian judiciary could formally inculcate the doctrine of reverse piercing as recommended above, to improve the application of the doctrine further. 25 Singh, The Doctrine of Reverse Piercing of Corporate Veil: Its Applicability in India, 27 TRUSTS & TRUSTEES 108-117 (2021).