INTRODUCTION
Section 2(20) of the Companies Act, 2013[1] defines a company as “a company formed and registered under” the Companies Act, 2013, or under any previous company law.” The term ‘company’, ordinarily, cannot be given any strictly technical or legal meaning[2]. A company is a legal entity separate from the persons who formed it. The death or personal insolvency of individual members does not affect the company’s existence[3]. Being an entity separate from its members, such a company is even capable of surviving beyond the lives of its members[4]. The company enjoys a separate set of rights and duties of its own and continues to operate in its name, unless and until it is forced by law to wind up[5].
The company form is the only form of business organization that affords the privilege of limiting personal liability for business debts. For this reason, company form has proved to be the most dominant and widespread form of business organization. People who seek to start their business venture, are lured towards the company form of business since it is the only form of business organization that provides them the opportunity to distance themselves from the debts arising in the business. On acquiring its separate entity, the company thus relieves its owners from every liability that the company incurs while operating in its name. The members, as a whole, neither own the company’s undertakings nor can be held liable for its debts[6]. This is primarily how a company’s form of business differs from a partnership. While in a company, none of the members running the business are bound to contribute anything more than the nominal value of their shares, for a partnership, the partners suffer an unlimited liability regarding the business debts. Not only are the partners bound, without any limit, to meet the business obligations, but the creditors of the business may even levy execution on the partners’ private property. Being a body corporate, a company can also sue and be sued in its legal name[7]. Similarly, a company is allowed to file a criminal complaint before a court of law, provided it is represented by a natural person[8]. A company is also entitled to sue for any defamatory remarks made against it, in an attempt to protect its fair name[9].
THE CORPORATE VEIL
The separate legal entity of a company shields the members of a company from being held liable for their actions[10]. The members, being afforded the privilege of trading with limited liability, often forget that it is they who run the company’s business, and therefore they are to be ultimately held responsible for their actions. Every business, in reality, is carried on in the legal name of a company but is performed by and for the benefit of some group of humans, i.e., the members[11]. In essence, the corporate veil is a symbolic barrier that separates the corporation from its directors and shareholders, with liability not being allowed to pass through. On several occasions, we find that the directors of a company, taking advantage of the protection afforded by such a corporate veil, indulge in unethical and fraudulent practices, in the belief that they would escape liability[12]. This is where the courts are tasked with the duty of breaking through the corporate mask and determining the individuals or entities hiding behind such mask, who are responsible[13].
PROTECTING AGAINST ABUSE OF CORPORATE PERSONALITY: LESSONS FROM CASE LAWS
- Lifting the Veil
Freewheels (India) Ltd. v. Veda Mittra [1969, Delhi High Court][14]
‘Lifting the corporate veil’ basically means discovering more information about the company, by lifting or looking beyond its corporate veil[15]. In this case, Globe Motors Ltd. (the holding company), held 52% shares of Freewheels (India) Ltd. (the subsidiary company). When the subsidiary company proceeded to issue further share capital, the holding company objected. The holding company was concerned about two issues: (a) that they would be losing control over the subsidiary upon such issue of further share capital, and (b) that the price of the shares would fall. The holding company filed an injunction in the Delhi High Court to stop the subsidiary company from issuing further share capital. However, the Delhi High Court refused to grant such an injunction. It reaffirmed the law that both the holding and subsidiary companies are two distinct separate legal entities, despite the holding company holding 52% shares of the subsidiary company in this case. By lifting the corporate veil, the Court distinguished the legal existence of the holding and subsidiary companies, ruling that the subsidiary company is fully entitled to issue further share capital on its own and the holding company, regardless of its holding on the subsidiary company, has no say on the same. The law was laid down that a holding company cannot, hiding behind its corporate shield of being the dominant parent entity, dictate every functioning of the subsidiary company.
- Penetrating the Veil
In Re. F. G. (Films) Ltd. [1935][16]
In this case, an American company wanted to shoot a movie in India. The question arose before the Court about whether the movie made by the company would be American or English. The company wanted to register the movie in the Censorship Board as an American movie. However, the Court, by penetrating the corporate veil of the company, held that since the American subsidiary company was an agent of a parent English company, the movie made by the subsidiary company would be English and not American. Usually, for the ‘penetrating the corporate veil’ doctrine, the principal and agent relationship is used. This is based on the principle that the agent company is nothing more than the people running it, i.e., its shareholders (principal company). The company is a mere agent of its shareholders. To hold a company liable, the shareholders ought to be held liable. Thus, in this case, the Court, applying this doctrine, held that since the American subsidiary company (agent) was being run by its principal English company, the resulting movie would be English.
- Extending the Veil
Gilford Motors Co. v Horne [1933][17]
In this case, Mr. Horne, an employee of Gilford Motors Co., left the company. While being in employment, he had entered into a contract with his company that he would not take the company’s clients[18]. Subsequently, Mr Horne set up his own company (say, company ‘H’), and started stealing all the clients of Gilford Motors Co. H’s shareholders were Mr Horne’s wife and son. Being unhappy, Gilford Motors moved the Court. The Court said that it would view company H and Mr Horne as the same legal person. The Court extended the view of H Co., over Mr Horne, and held that on regarding Mr Horne and H as one entity, it followed that there was a contract between Mr Horne (and H), with Gilford Motors Co., which Mr Horne had violated subsequently, and thus shall be held guilty. The court, by incorporating the ‘extending the veil’ doctrine, thus extended the corporate veil of company H, over its owner, Mr. Horne, to make Mr. Horne liable for violating the contract that he had previously entered with Gilford Motors Co.
- Ignoring the Veil
Prest v Petrodel Resources Ltd & Ors [2013][19]
There are two instances where the Court incorporates the ‘ignoring the veil’ doctrine, to ignore the facade of a subsidiary company and make the holding company liable: (a) limitations imposed by law and (b) trying to bypass the rights of relief possessed by a third party. In this case, a new subsidiary company was created. The question arose before the Court as to whether the company was created for a bona fide reason, or was created to evade tax liability. If the company is created to evade any legal obligation or liability, the Court must, by applying the ‘ignoring the veil’ doctrine, ignore the veil of the subsidiary company and declare it as a ‘sham’ company[20]. However, the Court held that in this case, the ‘sham’ or ‘facade’ argument could not be applied because the parent holding company was created for a legitimate purpose, and not as a sham. The Court specifically pointed out that only if the company itself is created for the very purpose of evading any obligation or liability, it is to be held as a sham company. If a company is established for a bona fide and legitimate purpose, it cannot be declared as a sham company.
CONCLUSION
The dual nature of corporate personality serves as both a shield and a sword, embodying the intricate balance between protection and accountability within the corporate realm. The concept of corporate personality allows companies to operate as separate legal entities, providing advantages such as perpetual succession and limited liability, which are crucial for fostering business growth and innovation. However, this separation can also be exploited, leading to unethical practices and the evasion of responsibilities. This delicate balance underscores the importance of robust legal frameworks and vigilant judicial oversight to ensure that the abuses of corporate personality do not outweigh its benefits.
Author(s) Name: Gaurav Chakrabarti (St. Xavier’s University, Kolkata)
References:
[1] Companies Act 2013, s 2(20)
[2] All Answers ltd, ‘Company has No Strictly Technical Meaning’ (Lawteacher.net, June 2024) <https://www.lawteacher.net/free-law-essays/constitutional-law/company-has-no-strictly-technical-meaning.php?vref=1> accessed 8 June 2024
[3] Salomon v A Salomon & Co Ltd [1897] AC 22 (HL)
[4] Salomon v A Salomon & Co Ltd [1897] AC 22 (HL)
[5] Lee v Lee’s Air Farming Ltd [1961] AC 12
[6] Macaura v Northern Assurance Co Ltd [1925] AC 619 (HL)
[7] Foss v Harbottle (1843) 2 Hare 461
[8] Derbyshire CC v Times Newspapers Ltd [1993] AC 534
[9] TVS Employees Federation v TVS & Sons Ltd (1996) 87 Comp Cas (Mad)
[10] Adams v Cape Industries plc [1990] Ch 433 (CA)
[11] Gallagher v Germania Brewing Co (1893), 53 Minn 214: 54 NW 1115, (MITCHEL LJ)
[12] Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705
[13] Avtar Singh, Company Law (17th edn, EBC 2020) 13
[14] Freewheels (India) Ltd. v. Veda Mittra [1969] Delhi High Court
[15] DHN Food Distributors Ltd v Tower Hamlets LBC [1976] 1 WLR 852
[16] In Re. F. G. (Films) Ltd. [1935] 1 Ch 392
[17] Gilford Motor Co Ltd v Horne [1933] Ch 935
[18] Chehak Gandhi, ‘Gilford Motor Company, Limited v. Horne’ (Legal Vidhiya, 17 August, 2023) <https://www.legalvidhiya.com/gilford-motor-company-limited-v-horne/1> accessed 8 June 2024
[19] Prest v Petrodel Resources Ltd & Ors [2013] UKSC 34
[20] All Answers ltd, ‘Prest v Petrodel’ (Lawteacher.net, June 2024) <https://www.lawteacher.net/cases/prest-v-petrodel-resources.php?vref=1> accessed 8 June 2024
