Anushree Poddar

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STANDARDISATION OF APPROACH: CAN THERE BE AN OBJECTIVE TEST FOR LIFTING OF THE CORPORATE VEIL?

As elucidated in Volume I, the Courts apply different standards and tests to determine whether the corporate veil should be lifted. Following the comparative analysis of the concept of lifting of corporate veil, the motive of this article is to examine whether there can be a standardized approach for invoking the concept.

When corporations fail to follow the statutorily mandated formalities, co-mingle funds, or ignore the restrictions in their articles of incorporation regarding separate treatment of corporate property, the courts deem it appropriate to disregard the separate identity and do not permit shareholders to be sheltered from liability to third parties for damages caused by the corporations’ acts. [1]

While analyzing when the corporate veil should be pierced in Sudhir Gopi, the Supreme Court held that a “corporate veil can be pierced only in rare cases where the Court comes to the conclusion that the conduct of the shareholder is abusive and the corporate façade is used for an improper purpose, for perpetuating a fraud, or for circumventing a statute.” Further, the Court held an abuse of corporate form to be the bare minimum pre-condition for the corporate entity to be disregarded and for the imposition of the obligations of such entity on its shareholders or directors. [2] In the Sudhir Gopi case, the Court did reverse the decision of the arbitral tribunal and refused to pierce the veil because IGNOU never argued that the very incorporation of UEIT was a sham or fraud. [3] Therefore, in essence, absolute control and a subsequent breach of a contractual liability cannot be sufficient reasons for lifting of corporate veil because directors and shareholders inevitably exercise considerable managerial and decision-making control in any company by virtue of holding their respective designations.

Previously, in Life Insurance Corporation of India v. Escorts Ltd., [4] the Supreme Court had emphasised that the corporate veil must only be lifted in exceptional circumstances “where a statute itself requires lifting of corporate veil or in cases of fraud or where a taxing statute or a beneficent statute is sought to be circumvented.” In yet another attempt to offer a judicial explanation for the concept of piercing of corporate veil, the Courts had held that the veil would be lifted when “the policy behind the presumption of corporate independence and limited shareholder liability— encouragement of business development—is outweighed by the policy justifying disregarding the corporate form—the need to protect those who deal with the corporation.” [5] This, again, is only an indicative way to determine whether the veil should be pierced and there is no objective test.

The explanations for lifting the corporate veil in itself are so subjective that even if, in arguendo, a particular test becomes the ground rule to determine whether or not the veil would be lifted, there would be multiple ways of reasoning around the same rule on both sides. It is largely based on the facts and circumstances of a case. Due to this very reason, veil piercing is often critiqued for being “rare, unprincipled, and arbitrary” [6] and because it “achieves neither fairness nor efficiency, but rather only uncertainty and lack of predictability.” [7] Thus, a judicious use of the doctrine and a more standardized approach of its invocation is the best way to strike a balance.

References

¹ SM Bainbridge, ‘Abolishing LLC Veil Piercing’ [2005] U. ILL. L. REV. 77, 93

² Sudhir Gopi v. Indira Gandhi National Open University 2017 SCC OnLine Del 8345 [40]

³ Sudhir Gopi v. Indira Gandhi National Open University 2017 SCC OnLine Del 8345

⁴ (1986) 1 SCC 264.

⁵ Wm. Passalacqua Builders, Inc. v Resnick Developers South Inc. 933 F.2d 131, 139

⁶ Frank H. Easterbrook & Daniel R. Fischel, ‘Limited Liability and the Corporation’ [1985] 52 U. CHI. L. REV. 89, 89

⁷ SM Bainbridge, ‘Abolishing LLC Veil Piercing’ [2005] U. ILL. L. REV. 77, 78

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In case of any queries with regards to the present article, Anushree can be reached at anushreepoddar2000@gmail.com

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