Author: Varsha Agarwal, IV year of B.A.,LL.B.(Hons.) from National Law University, Jodhpur.
INTRODUCTION
“We live on veils for protecting ourselves from evil things… or for hiding our evilness.”
-Yeshfin Idris
The idea of an association having a distinct legal personality from its members can be traced to the case of In Re: The Kondoli Tea, where the Calcutta High court held that the Kondoli Tea Co. Ltd is a separate body. The concept was then further explained and reiterated in several other cases, the most famous being, the case of Salomon v. Salomon, where the juridical persons were classified into:-
i. Corporate Body - any form of association of natural persons formed to protect the collective interest of its members; and
ii. Body Corporate - corporate body which has an independent and distinct legal personality separate from the natural persons forming it.
However, the corporate veil of a company can be lifted in certain situation. Thus, it becomes important to look into the grounds under which such lifting can be done, especially if such grounds are not precisely defined under law such as public interest.
A. Piercing of Corporate Veil
The main significance of corporate veil is that it limits the liability of its members because for the defaults made by the company (there are several forms of body corporates, one such form which is registered under the Indian Companies Act is called company) in the course of its business, mentioned in the memorandum of association, it is the companywhich is made responsible, not the individuals.
However, in reality, the business is conducted by these persons for their collective interest as held in the case of Gallaghar v. Germania Brewing Company –“By fiction of law, a corporation is a distinct entity, yet in reality it is an association of persons who ape in fact the beneficial owners of all the corporate property.” Consequently, there it is a possibility that under the grab of the corporate veil, they commit fraud, do any illegal activities, going beyond the scope of their memorandum of association. Thus, to restrict such wrongful conduct came, the concept of piercing/lifting of corporate veil.Such lifting of corporate veil comes from the mix of bracket theory and purpose theory. A company is made for the purpose of allowing the individuals to represent their interest collectively but if they go beyond this bracket, the corporate veil is lifted.
The questions with regard to the scope and nature of the corporate veil were resolved by cases like, Life Insurance Corporation of India v. Escorts Ltd and Cotton Corporation of India v. Odusumath, where it has been held that corporate veil is not absolute, but it can be pierced only for compelling reasons. Life Insurance Corporation held that “The corporate personality may be ignored and the individual members recognised for who they are in certain exceptional circumstances… generally and broadly speaking, the corporate veil may be lifted where a statute itself contemplates lifting the veil, or fraud or improper conduct is intended to be prevented or a taxing statute or a beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be in reality, part of one concern.” Similarly, Cotton Corporation held that “Lifting of the corporation veil of a company as a rule is not permissible in law unless otherwise provided by clear words of the statute or by very compelling reasons such as where fraud is intended to be prevented or trading with enemy company is sought to be defeated.”
The courts may lift the corporate veil may broadly under the following two categories:-
i. Under statutory provisions: Under the Indian Companies Act [Hereinafter “ICA, 2013”], mentions sections like section 12, section 35, section 39, etc. expressly state that the members will be personally liable; Foreign Exchange Management Act and other statues.
ii. Under judicial interpretations: The courts have also lifted the corporate veil, even in absence of statutory provisions,by citing public interest.
Public interest is the second ground to pierce the corporate veil. Statutory provisionsare defined in certain terms, but not public interest. Consequently, it becomes important to look into its usage, scope and meaning.
I. Case Laws
There are numerous cases where public interest has led to the lifting of corporate veil. In the case State of Rajasthan v. Gotan Lime Stone, the corporate veil was used to do an act indirectly which is directly prohibited by law, i.e., sale of the license to a company outside the corporate group, without informing the government and without payment of transfer fee, which goes to the public exchequer and is used for public welfare. Thus, the action was held to be violative of public interest and led to lifting of corporate veil. In other cases, public interest has been usedto protect government revenue (Sir DinshawManeckjee Petit Re), to prevent sham incorporations (Delhi Development Authority v. Skipper Construction), prevent use of company for illegal purposes (PNB Finance Limited v. Shital Prasad Jain), and so on.
II. Definition and Scope
Black law’s dictionarydefines public interest as the interest of the society at large as compared to that of an individual person or an entity. A thing is said to be in public interest where it is or can be made to appear to be contributing to the general welfare rather than to the special privilege of a class, group or individua, as per NR Murthy case. However, there is no particular general definition which is given to the term public interest by courts. It remains as a case-to-case analysis, where as per the facts and the context, the meaning is given to public interest.
In State of Bihar v. Kameshwar Singhit was observed that the phrase “public purpose”, is not capable of being given a precise rigid meaning. It is an elastic concept which takes its colours from the statute in which it occurs, the concept varying with the time and state of society and its needs. The Supreme Court in Life Insurance Corporation v. Escort held that “it is neither necessary nor desirable to enumerate the classes of cases where lifting the corporate 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 the public interest, and the effect on the parties who may be affected etc.”Thus, the scope of public interest in the Indian jurisprudence remains wide open.
“The idea of public interest is a vague, impalpable, but all controlling consideration.”
- Frankfurter, J
The scope of public interest seems to be ever expandingdue it being not defined anywhere. There are disadvantages to leaving things wide open. An open-ended definition can be misused to unnecessarily interfere with the working of corporates. There will be no certainty that the corporates would have with their actions because without the a precisedefined anyone can object to its decisions on the ground of being violative of public interest, increasing the litigations and thereby increasing the costs and wasting time of the corporate as well as the courts when cases are frivolously filed. The judges can mold the concept as per their whims and fancies.
However, despite these disadvantages, there are stronger reasons to keep the term open-ended:-
I. Significance of Public interest
It was public interest for which the political system was created. Social contract theories state that humans created civil society to ensure better protection of their life, liberty and interests which were always under a threat in the state of nature. If one closely looks at the concept of corporate veil/corporate legal personality, one can see it also came for interest of the people. It came to allow its members protect their collective interest better by forming an association as well as to help them limit their liability. So, it would be ironical and absurd to allow its usage to go against the public interest, to use the veil to legitimize acts against the public. This is the rationale behind keeping public interest as a ground to lift the corporate veil.
The importance of the term public interest is so much so that it is a ground not just to lift corporate veil, but several other actions. The phrase public interest has been used numerous times in the ICA, 2013- under section 210, public interest allows the government to investigate into the affairs of the company; under section 462 certain companies in public interest can exempted from the provisions of the ICA, 2013; under section 446A, public interest is a ground to determine the level of punishment; etc. Not just in company law, public interest is used as a defence against so many other actions ranging from making contracts to exercising fundamental rights. Defining such a significant term in few limited words is undermining its importance.
II. Dynamic term
With the frequent changes in our social, political, technologicaland economic environment, the concept of public interest is destined to alter as well, and giving a rigid definition to the same will defeat the purpose of it being a ground to lift corporate veil. One can simply look at the idea of crypto-currencyto realize that new ideas keep on evolving and are too complex to be anticipated.
III. No agreement
Everyone believes in the idea of protecting public interest but what the concept exactly entails, is what creates a divide among the people. There are as many definitions of public interest as many as the people in this world. So, how could someone expect the judges to define such a significant dynamic concept in precise terms. The situation is very similar to that in Kesvanada Bhartiwhere the majority judges agreed that there is a basic structure but as regards to what constitutes the basic structure there is a divide.
IV. Only partial breach
It is also to be noted that when the corporate veil is lifted, the lifting is limited. Only the officers in default read with controlare held responsible, not every person. For instance, in the case of Escort there was a need to determine the nationality or origin of the shareholders.The corporate veil was lifted to only that extent and no more.
V. Loopholes
One can simply look at the rationale for the development of competition law and reasons for criminalizing insider trading, money laundering, other economic offense to realize human beings always wish to maximize their wealth. Similarly, the company owners and managers are always on the lookout for maximizing their share value/improving their returns. They don’t care about the interest of the society at large. So, once the phrase ‘public interest’ is defined, they would obviously find loopholes in the same as creating a fool-proof definition is not a possibility.
VI. Absurdity
A body corporate is said to be amixing point of realist and artificial person theorybecause though it a real person because it has an interest which is protected by substantive law, it still possesses no brain of its own. The body corporate depends on its natural persons to take decisions and explained as above is the nature of humans. So, once the term is defined, corporate will be held responsible for acts against public interest, that don’t fall in the definitioninstead of the members who run it, which is absurd.
VII. Rule of law
It is true that having certainty in law is a fundamental part of rule of law but an equally fundamental part is making sure that the law is wholesome. To make the law wholesome, it is necessary that the judiciary must have a tool in its hand to safeguard the society and such tool is possible only when the definition of the term public interest is kept open, because when all grounds fail, public interest is there as a last resort to do complete justice.
VIII.Other Solution to the objections
As regards to the objection about having certainty, the court can instead of defining the term public interest completely provide some instances of what the term includes and anyways, each judgment itself acts an instance providing the body corporates, a basic sense as to what the term entails.Also, if the company is not doing anything unethical, it doesn’t have a problem with the term being undefined. Regarding the problem of litigation and whimsical judges, such a problem exists not just for companies but for all entities and the solution for it is efficient judiciary, rather than definition of public interest.
Thus,though there are arguments to define the term there are even stronger arguments to keep it open.
“Virtue has a veil; vice has a mask.”
-Victor Hugo
Corporate veil refers to the fictitious barrier between the body corporate and the persons forming it.Two circumstances allow for its lifting —statutory provisions and judicial interpretation/public interest. The Indian courts have kept the term public interest open-ended, but a vaguedefinition can be misused to unnecessarily interfere with the corporates. However, defining the same creates larger problems because the meaning of the term changes with time;being such a wide and significant term even in the present time, it can’t be defined; definitionswould differ highly among the judges, definition won’t be fool-proof making it liable to be misused, which is one of the objections against keeping it open, and such others. The objections to it can be resolved by other ways like giving a tentative list of instances covered by public interest. If every human was an angel, there would be no need of governance but since this is not the case, public interest must be protected, for which an expansive meaning of public interest is needed.
End Notes
· In Re: The Kondoli Tea Co. Ld. v. Unknown, (1886) ILR 13 Cal 43.
· Salomon v. A Salomon & Co Ltd, [1896] UKHL 1.
· Indian Companies Act, 2013, No. 18, Acts of Parliament, 2013 (India).
· Gallaghar v. Germania Brewing Company, [1893] 53 MINN. 214.
· Life Insurance Corporation of India v. Escorts Ltd, 1986 AIR 1370.
· Cotton Corporation of India v. G. C. Odusumath, ILR 1998 KAR 2553.
· GK Kapoor,Company Law and Practice 19-27 (Taxmann 2019).
· Foreign Exchange Management Act, 1999, No. 42, Acts of Parliament, 1999 (India).
· State of Rajasthan v. Gotan Lime Stone, AIR 2016 SC 510.
· Sir DinshawManeckjee Petit Re, AIR 1927 Bom. 371.
· Delhi Development Authority v. Skipper Construction Company (P.) Ltd., 1996 SCC (4) 622.
· PNB Finance Limited v. Shital Prasad Jain, [1983] 54 Comp. Cas. 66 (Delhi).
· Public Interest, Black’s law dictionary (14th ed. 2021).
· N.R. Murty v. Industrial Development Corporation of Orissa Ltd., [1977] 47 Comp. Cas. 389 (Ori.).
· State of Bihar v. Kameshwar Singh, AIR 1952 SC 252.
· Kesavananda Bharati vs State of Kerala, AIR 1973 SC 1461.
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