Reverse Piercing of the Corporate Veil in India

Author: Kohina Bhargava

Institute – Government New Law College, Indore

The term “reverse piercing of the corporate veil” refers to the doctrine which differentiates between a company and its shareholders/members. This doctrine is similar to the doctrine of piercing the corporate veil. It is a concept under the California law. It’s a new concept, which has resulted in controversy in the realm of corporate law despite being a huge development in commercial law. This doctrine has emerged from the decision of Supreme Court (U.S.) in W.G. Platts, Inc. v. Platts case . It is one of the many principles which highlight the differences between the attitudes towards corporate façade across various jurisdictions .
“The [mere] abstraction of the corporate entity should never be allowed to block out and corrupt the genuine and plain truth,” wrote Arra J, District Judge. This firmly established the idea in the American legal system. After that, ‘reverse’ piercing was used in a slew of cases.

Corporate Personality
After incorporation, the company and its members are divided into two separate legal identities. This principle of separation is termed as corporate personality or Corporate Veil i.e. company and its member are separated through the curtain. But in reality, company is directly or indirectly dependent on its members, directors, or partners for performing their functions. So, according to the principle of corporate personality the members of company can only use corporate personalities for legitimate work. But it’s usually observed that the members, including the directors, use the tag of corporate personalities to extent their liability from doing such an illegal act. Thus we have another principle name as lifting up of corporate veil to protect the illegal use of corporate personalities. In these cases, the court lifts the corporate veil to find who is responsible for the particular act.
Circumstances where this principle is used:-
 Fraud or Improper Conduct:
When corporate personalities are used to perform any illegal act then court lift the veil .
 Evasion of tax:
If the main or principle company establishes another branch or other company with the sole intention of obtaining relax from tax or avoiding welfare legislation. It is the most common or basic ground for lifting of corporate veil. If corporate personalities are made with the purpose of evasion of tax then the court will definitely apply the principle of lifting up of corporate veil.
 When company is a cloak or sham :
In this scenario when the company is a cloak or sham i.e. company is made due to the purpose of showing off.
 Determination of enemy character :
The 4th scenario of this principle is war.
Corporate Veil
A company is formed by members and managed by the board of directors with the assistance of officers and employees or in corporation, law gives separate entity to the company.
In corporation law gives separate entity to the entity. The company’s money and property belongs to the company not to its shareholders. Thus a fiction is created by law by which the rights, properties, powers, functions, duties & liabilities of a company is differentiated from functions, duties, properties, liabilities, rights & powers of the officers and this fiction is known as veil just because the veil created by law due to incorporation in company. Thus, this veil is termed as corporate veil.
In India
Corporate veil piercing is the liability to pay the debts of individual shareholders upon the corporation or upon its subsidiaries for the acts of their parent corporation.
This doctrine is new and has not been accepted universally. A similar situation exists in India as this principle is only partially accepted in India.
Reverse piercing in India is of two types: –
• Inside Reverse Piercing – Carried out by the corporation owners to take advantage of the corporation.
• Outside Reverse Piercing – It occurs when a party with a claim against an individual shareholder imposes liability upon the corporation for the debts of that individual.
Despite being a debatable topic in India, it is considered as an appropriate remedy. The creditor (shareholders) creates a liability on the corporation for their own wrongful acts instead of compensating others themself. They enjoy limited liability and get financial protection from others. However, the principle of separate legal entity is misused by the shareholders while members of corporation also misuse it to escape their liabilities. As the new avenues are developing in India, we need an improved arsenal to tackle impropriety by the usage of corporate veil .
According to the Indian courts, a corporation is non-natural person and does not act on its own, instead its officers and directors control it. Thus the corporation is not liable completely . This laid to the foundation of the principle named as ‘Doctrine of reverse piercing of corporate veil’.
Indian scenario requires that how the courts have applied the concept and analyse it .

There are 3 elements regarding the application of the doctrine of reverse piercing: –
• Degree of identity – Decree of identity among the shareholders, directors, officers, members and the corporation by taking into account the ‘alter ego’ or ‘instrumentality doctrines’.
• Public Policy – If a pierce would harm other innocent parties by using the cost-benefit analysis.
• Other remedy – If there is any other remedy to rectify the situation or not rectifying the situation. If there is no other remedy, then the doctrine of reverse piercing must be invoked to promote the justice.
Lifting the corporate veil
The main aim of lifting the corporate veil is to ensure corporate personality shall be used only for legitimate purpose. If someone uses the corporate personality for doing an illegal act, fraud, misuse, engage in any other illegal activity then the court will definitely apply the principle of corporate veil.
Conclusion
A controversial area of corporate law is doctrine of reverse piercing. While its less universally recognized doctrine as compare to the traditional doctrine named as veil piercing . Unlike the piercing of the corporate veil doctrine, which holds an individual shareholder accountable for corporate wrongdoings in specific circumstances, the reverse piercing of the corporate veil doctrine holds the corporation liable for the activities of an individual member. In cases where a body corporate has several stockholders, this theory could be problematic. Conversely, there have been instances where it has provided creditors of a single shareholder an advantage that they would not typically have in relation to the corporation’s creditors. As a result, when compared to typical veil piercing, the notion of “reverse” piercing is less widely accepted.

References

1.W G Platts case of 1956

2. McCall Stock Farms, Inc. vs. Unites States

3. Case: Jones vs. Lipman; in this case lipman do a contract with jones to sell his property to jones.

4.Lipman sold his property to his own company to protect or safeguards himself regarding specific performance of the contract.

Jones file a case where court observed that the company has only two shares Lipman and clerk. Thus court held that lipman uses his company as a mask (cover) to take relief from the performance of the contract. And it’s a fraudulent act, thus lipman is bound to perform the contract.
5. Case:- Gilford motor company limited vs. Horne employ of Gilford company
6. Case: – Daimler Co. Ltd. vs. Continental tyre and rubber Co. Ltd.
7. Case: – Salomon vs. Salomon and Company Ltd., 1987
Standard Chartered Bank v. Directorate of Enforcement

8. Later Chief Justice Benjamin Cardozo wrote in 1926 that, “Metaphors in law are to be narrowly watched, for starting as devices to liberate thought; they end often by enslaving it.”
9. Landmark Case: – Standard Chartered Bank vs. Directorate of Enforcement (Supreme Court held for the first time, “a corporation can be prosecuted and punished for an offence with fines, regardless of the mandatory punishment required under respective statutes”.)
10. Macuara v. Northern Assurance Co. Ltd.- (This case lead the basis of “separate legal existence” of the company rule which must not be done away in any circumstances.)
11. Balwant Rai Saluja & Anr Etc. Etc. Appellants vs. Air India Ltd. And Ors. Respondents on 13 November, 2013.

12. Case- W.G. Platts, Inc. v. Platts (1956)

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