Background
In the classical U K case of Salomon – vs.- Salomon & Co., 1897 AC 22, the legal position of a company was established having far reaching consequences in corporate jurisprudence .
It was held by the Court, in that case, that a company is a separate legal entity and has independent and separate existence. It is, thus, separate from its shareholders and can own assets that are separate and distinct from those of its shareholders. A company can sue and be sued exclusively for its own purposes. Moreover, creditors of a company cannot obtain satisfaction from the assets of the company’s shareholders and the liability of the shareholders is limited to the capital invested by them.
Foundation of Company Legislation
This legal principle has been upheld by numerous courts in India from time to time. This forms the back bone and the base of the Indian Company Law from the very inception.
Deviation- Lifting of Corporate Veil
However, the above legal position of a company has been deviated by the courts, from time to time, and therefore there have been lifting or piercing of Corporate Veils of companies. In many cases the shareholders have been held liable for company’s misdemeanours/misdeeds. Thus the separate existence of the shareholders and that of the company had been ignored and they were treated as one and the same for the sake of justice.
Only in exceptional cases
Lifting of Corporate Veil, is done by the Courts in exceptional cases, where there are established frauds, illegality and the like by the shareholders, or by the persons associated with the company who take advantage and shelter of the separate legal entity of the company, to perpetuate fraud etc and escape punishment.
Pertinently, it must be established before the court that there has been commission or omission of fraud, illegality, etc. so as to enable the court to lift the corporate veil, to hold the persons liable who are actually responsible and who are taking shelter behind the corporate separate legal entity to escape liability and punishment. If such commission or omission cannot be established, the courts will not lift the Corporate Veil and the well known legal principle of separate legal entity of a company established by the U K Court in the Salomon –vs- Salomon & Co. case in 1897, will continue to be upheld.
Principle of Salomon case reigns supreme
In the case of Punjab National Bank –vs.- Bareja Knipping Fasteners Ltd. (2001) 103 Com. Cases, it was held that court decree against a company cannot be satisfied by attachment and sale of properties belonging to other companies even if there are being managed by same group of persons.
In another case of Polly Peck International Plc, (In Administration) (No.3) Re (1996) 1 BCLC 428 (CHD), the court had held that all companies in a group are separate legal entities and have to be so regarded unless they are compelling consideration to make departure from the Salomon case principle.
In the case of Tate Acess Floors Inc. -vs.- Boswell (1991) CH 512, the court was of the view in the matters of property and contract the courts should be most hesitant to lift the veil in response to superficial considerations of common sense, reality, or fairness.
In the case of Gas Lighting Improvement Co Ltd - vs.- Commissioners of Inland Revenue (1923) AC 723, it was held that it was the company as a separate person that owned company’s property and entered into the contracts and incurred debts. Thus shareholders or any other person/s were not to be taken into consideration for owning of company’s property etc.
Conclusion
It is very apparent that separate existence of company is the pivot of the company jurisprudence and any interpretation of Indian company law has to be done kept this into account. Departure from this legal principle can only be done by the courts, that too in rare cases, and not by compliance professionals of company law.
AMITAV GANGULY
CAclubindia
