Anushree Poddar
LIFTING THE CORPORATE VEIL FOR BREACH OF CONTRACTUAL OBLIGATIONS
The concept of separate legal entity, a legal fiction created by the statutes, enables a company and individuals associated with the company to act completely independent of each other. In Saloman v. Saloman,[1] the House of Lords held that a duly incorporated company is an independent person with its own rights and liabilities, and that the motives of those who take part in the promotion of the Company are absolutely irrelevant in discussing what the rights and liabilities are. In essence, while laying down the concept of separate legal entity, this case created a corporate veil between a company and its shareholders by giving a company its very own legal identity. However, in light of the recognition of the legal personhood of a company, it is also imperative to ensure that such a provision is not misused by companies and shareholders to defraud a third party or make wrongful gains by shifting legal burdens. Thus, in order to prevent fraud, the Court pierces through this corporate veil or lifts the corporate veil between a company and its shareholder if there has been a potentially dishonest use of the provision. The main purpose of this article is to understand whether the corporate veil should be lifted in cases of breach of contractual obligations.
The concept of lifting of corporate veil has evolved considerably. Considering that there may arise circumstances which compel the courts to identify a company with its members [2], the courts have lifted the corporate veil, in cases after cases, in the interests of justice and to ensure transparency. In the expanding horizon of modern jurisprudence, “lifting of the corporate veil is permissible; its frontiers are unlimited.” [3] While the lifting of corporate veil benefits third parties and the government to protect them from potential frauds and tax evasions [4] respectively, companies often see it as a disadvantage due to its ever-changing and ever-enlarging scope. The advantages of incorporation should be allowed only to those who want to make an honest use of the ‘company’[5] but lifting of corporate veil can be unjust and disadvantageous for companies because in reality, the concept of separate legal entity is merely a legal fiction and ultimately, companies are “an association of persons who are in fact the beneficial owners of all the corporate property.” [6] The scope of judicial interpretation is so large that the question of lifting of the corporate veil is completely based on judicial discretion.
In the case of Sudhir Gopi v. IGNOU,[7] the question of lifting of corporate veil arose when there was a breach in the contractual obligation between IGNOU and UEIT, with Sudhir Gopi as the Chairman, Managing Director and principal shareholder holding ninety-nine out of hundred shares in UEIT. IGNOU contended that Mr. Gopi was running the business under the facade of UEIT and essentially there was no difference between Mr. Gopi, the sole in-charge of the affairs of UEIT, and UEIT. [8] However, the Supreme Court ruled that solely because a person holds controlling interest in a company and is in-charge of rendering its business does not ipso jure render them personally bound by all agreements entered into by the company. [9]
In another case, Gilford Motor Co. v. Horne, [10] the Defendant sold his business to the plaintiff and agreed not to compete with him for a given number of years within reasonable local limits but ultimately, being desirous of re-entering business and in violation of the contractual obligation, the Defendant formed a private company with majority shareholdings. [11] In this case, when the Plaintiff initiated legal proceedings against him and the private company jointly and severally, the Court granted an injunction restraining the Plaintiff and his company with respect to continuing on with the business. Here, the breach of contract was such that it was necessary for the Defendant and the Company to be considered as a unit for the injunction.
In the Sudhir Gopi case,[12] the Courts upheld the separate legal entity concept by ruling that a mere failure of a corporate entity to meet its contractual obligation cannot be considered an adequate ground for lifting of the corporate veil because the company was not merely created to circumvent the law. Lifting of corporate veil for any and every breach of contract may not just be disadvantageous to a person exercising control but also dilute the entire concept of separate legal entity. However, in the Gilford case, the incorporation of the companywas in itself a breach of a contract which is why the corporate veil was lifted in this case. The Courts often see through the way the provision may have been used to circumvent the law and decided to lift the corporate veil. Thus, whether the corporate veil would be lifted or not is determined on a case-by-case basis.
References
1 [1897] AC 22.
2 Avtar Singh, Company Law (17th edn, EBC 2018) 15
3 State of Uttar Pradesh v Renusagar Power Co (1988) 4 SCC 59
4 In Re. Sir Dinshaw Maneckjee Petit Bart AIR 1927 BOMBAY 371
5 Arjya B Majumdar, ‘Corporate Personality in India’ ( SSRN, 17 December 2007) < https://ssrn.com/abstract=2256140> accessed 11 November 2020
6 Gallagher v Germania Brewing Co 54 NW 1115 (1893)
7 Sudhir Gopi v. Indira Gandhi National Open University 2017 SCC OnLine Del 8345
8 Sudhir Gopi v. Indira Gandhi National Open University 2017 SCC OnLine Del 8345 [9]
9 Sudhir Gopi v. Indira Gandhi National Open University 2017 SCC OnLine Del 8345 [34]
10 [1933] 1 Ex.Ch 935.
11 Arjya B Majumdar, ‘Corporate Personality in India’ ( SSRN, 17 December 2007) < https://ssrn.com/abstract=2256140> accessed 11 November 2020
12 Sudhir Gopi v. Indira Gandhi National Open University 2017 SCC OnLine Del 8345 [41]
In case of any queries with regards to the present article, Anushree can be reached at anushreepoddar2000@gmail.com
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