Lifting of corporate veil: judicial discretion on the ground of public policy

INTRODUCTION:

The doctrine of corporate veil is a borrowed English legal concept that separates the actions of the company from the actions of the persons associated with the company. It originates from the concepts of Separate Legal Entity and Limited Liability which protects the people associated with the company from being jointly liable for the company’s obligations or mistakes. This protection however, is not solid. Judiciary has the power to pierce through this protective veil to ascertain the people behind unlawful activities which are being carried on by individuals with a company’s identity.

Apart from certain statutory provisions governing the lifting the of corporate veil in India, judicial outlook is necessary from a perspective of a respectable judge, where discretion is exercised keeping in mind the causes, where it is more important to uplift the essence of public policy to which the corporate veil should not stand as a hinderance. This article is a discussion on the various judicial applications of the ground of public policy to pierce the corporate veil.

PUBLIC POLICY IN PUBLIC INTEREST:

In a 2016 case, a mining lease transfer was made through a change in shareholding of a company, without seeking the approval of the government. It was argued that the company is a separate legal entity and therefore a change in shareholders does mean that there was a transfer in the mining lease, at the end it remained with the same company. SC however lifted the corporate veil, identified it as a transfer of lease from one party to another and declared as an unauthorised transfer of the mining lease, the transaction was considered as void[1]. The reasoning of the court was based on the principles of violation of public policy made in public interest. Since this case revolved around the subject of a mining lease, courts also talked about the public trust doctrine- the principle that it is the government’s duty to maintain resources that must be preserved and maintain for public use.

Violation of public policy/public interests as a ground for lifting of the corporate veil in India has largely been a judicial decision instead of a well-defined and settled principle of law. Many have been doubtful over the use such an ambiguous reasoning for taking away one of the major advantages of having a company- the security of a separate corporate identity.

With its origins in Roman law, according to the public trust doctrine, natural resources are for the enjoyment and use of the general public and the government must ensure their protection mostly by ensuring state ownership and restricting exploitation for commercial purposes. In India, the judiciary has also taken steps to ensure protection of the environment by the application of the public trust doctrine. Reasoning is placed on Article 21 of the constitution which is the fundamental right to life guaranteed to every citizen of the country. This cover the right to a healthy environment and livelihood. The Public Trust doctrine has been applied in many important cases which have set an important precedent about the use of this doctrine to be used to meet the ends of justice.[2] However, of course protection of the environment for a healthy livelihood is only one of the interests of the public and this is where the ambiguity deepens.

It can be inferred from the words itself that the scope of what can be considered under public interest can be very wide. People criticising the 2016 judgement of the Gotan Limestone case mentioned above,  have argued that although the judgement pronounced was a good one, the reasoning should have been for fraud and not be based on the principles of public interest[3]. The objection towards the usage of public interest as the reasoning was two-fold- firstly, if the case could have been decided on the ground already available under a statutory provision (fraudulent conduct under S. 399 of the Companies Act 2013), then what was the need to bring in a new reasoning. Secondly, the ambit of what could come under this ground is too wide and therefore ambiguous. This in turn is detrimental to entrepreneurship, investments etc. The court should have defined public interest for the purposes of determining what would lead to the piercing of the corporate veil. The opposition to the setting of violation of public interest was also stressed by pointing out to the fact that English courts have sought to narrow the grounds on which the advantage of the corporate veil can be lifted[4]. This is undermining of the authority and legitimacy of the courts in India. It is borrowed principle from the English law, but the jurisprudence of Indian legal system has taken a different route on the subject.

The stress on using only fraud as the reasoning in the judgement, was based on the fact that they had fraudulently tried to work around a legal restriction which required prior government permission.  However, the ground on which such legal restriction is in essence, based on public interest[5]. Therefore, the court has simply brought forward the broader reasoning for the inclusion of the provision of fraud as a condition for lifting the corporate veil. It is not like the court has brought forward this reasoning out of thin air.

Judges have time and again exercised their discretionary power while deciding whether, in a particular case, the corporate veil should be lifted or not. Even in cases where the corporate has been found guilty of committing fraud, the judges still have the right to exercise their discretionary power while deciding if the corporate veil should be lifted or not even though ‘fraudulent conduct’ is already covered by the statutory provisions of the Indian Company Act, 2013[6].

Regarding the contention against the presence of ambiguity in the usage of public interest, it can be argued that such ambiguity to a certain extent is required to balance out the harm that corporate activities have the ability to commit due to the freedoms given by the government to these companies for betterment of the economy. The gaps that the letter of law leaves for the courts to fill in while interpreting, could be an opportunity for the courts to voice out on behalf of the public interest and public good. The ambiguous area that fraud and public policy ground takes up in lifting of the corporate veil can be justified as held in the case Life Insurance Corporation of India v. Escorts Limited & Ors[7], 

“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 uncertain and unpredictable ground under fraud and public policy ground where judicial discretion is exercised, should be allowed since it enables them to take into consideration various factors which might necessitate the need to lift the corporate veil. 

With respect to the claim that the discretionary power of judges can prevent the companies from enjoying the benefits provided by the limited liability status of the corporations, and can demotivate foreign investors from investing in Indian companies, it must be noted that since the Government has already passed laws and policies that enable companies to thrive in India which is beneficial for both the corporation and its investors, judicial discretion must be allowed so as to prevent them from exploiting their benefits as it might result in the encroachment of the rights of the citizens. 

CONCLUSION:

Bainbridge argued in his paper ‘Abolishing Corporate Veil’, that giving unlimited, arbitrary discretionary power to the judges in the cases of lifting of the corporate veil is neither beneficial for the existing justice system nor the society as it gives leeway for the Courts to set vague standards that would lead to uncertainty and lack of predictability. However, as discussed in this article, there is a need to strike up a balance between the two to facilitate and promote the economic growth and performance of the companies, the intention is certainly not to subvert the ends of justice. Thus, the doctrine of lifting of the corporate veil on the grounds of public policy is necessary and it can be aptly covered by exercising judicial discretion that are specific and meticulously uniform to a certain level. It is common knowledge today that the need for the expansion of the economy has led the government to make many incentivised provisions favourable for investments, setting up of companies, ease of doing business etc. All these incentives have also led to exploitation of the environment, labour, loopholes in the laws, etc. though it is a bold move of Indian the judiciary to keep and uphold the ambiguous public interest as a ground for piercing the corporate veil, and it is a necessary safeguard, it is quite pertinent to make sure that the courts keep up with certainty of causes and circumstances to lift the corporate veil.


[1] State of Rajasthan v. Gotan Lime Stone Khanji Udyog Pvt Ltd AIR 2016 SC 510

[2] M.C Mehta v. Kamal Nath (1997) 1 SCC 388, Th. Marja Singh v. Indian Oil Corporation AIR 1999 JK 81, M.I Builders v. Radhey Shyam Sahu AIR 1999 SC 2468

[3] Shivang Agarwal, “The vague concept of public interest as a ground for lifting the corporate Veil” (Centre for Business & Commercial Laws NLIU 2 April, 2018) https://cbcl.nliu.ac.in/company-law/the-vague-concept-of-public-interest-as-a-ground-for-lifting-the-corporate-veil/ accessed 25 November 2020

[4] Prest v. Petrodel Resources Ltd [2013] UKSC 34

[5] The mining act is arguably based on the doctrine of public trust

[6] Ibid (n 7)

[7] ibid (n 29).

Aishwarya Says:

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