Sunday, June 25, 2017

Applicability of the Doctrine of Corporate Veil to Societies

[Post by Munmi Phukon and Sagar Batra of Vinod Kothari & Company]

Meaning of Corporation or Body Corporate

Pursuant to Section 2(11) of the Companies Act, 2013 (CA, 2013), “body corporate” or “corporation” includes a company incorporated outside India, but does not include—

(i)        a co-operative society registered under any law relating to co-operative societies; and

(ii)       any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf.

However, the definition in CA, 2013 is inclusive and not an exhaustive one. The term has been elaborated under various judgments and has been interpreted with reference to the international scenario. A reference may be drawn to Halsbury's Laws of England, 3rd Edn. Vol.9, page 4, which reads:

A corporation aggregate has been defined as a collection of individuals united into one body under a special denomination, having perpetual succession under an artificial form, and vested by the policy of the law with the capacity of acting in several respects as an individual, particularly of taking and granting property, of contracting obligations and of suing and being sued, of enjoying privileges and immunities in common, and of exercising a variety of political rights, more or less extensive, according to the design of its institution, or the powers conferred upon it, either at the time of its creation or at any subsequent period of its existence. A corporation aggregate has therefore only one capacity, namely, its corporate capacity.

An essential element in the legal conception of a corporation is that its identity is continuous, that is, the original member or members and its or their successors who are composing it are persons wholly different from the corporation itself.  Thus, it has been held that a name is essential to a corporation and that a corporation can, as a general rule, only act or express its will by deed under its common seal.

Whether a Corporation Includes a Society?

A society is united together by mutual consent of its members to deliberate, determine and act jointly for the same common purpose. While on a reading of various provisions of the Societies Registration Act, 1860 (Societies Act), a registered society has the privileges analogous to that of a corporation such as separate legal personality, the power to sue or be sued, holding separate property, it does not however prove the intention of the law to provide for the creation of a corporation. The context holds its authority from the leading case law The Board of Trustees, Ayurvedic and Unani Tibia College v. The State of Delhi, in which the Supreme Court of India deliberated at length whether the nature of society is that of a corporation, and analysed the provisions of the Societies Act. The Court, while interpreting the provisions, held that a society is not a body corporate, by observing:

The most important point to be noticed in this connection is that in the various provisions of the Societies Registration Act, 1860, there are no sufficient words to indicate an intention to incorporate, on the contrary, the provisions show that there all absence of such intention. Section 2 no doubt provides for a name as also for the objects of the society. Section 5, however states that the property belonging to the society, if not vested in trustees, shall be deemed to be vested in the governing body of the society and in all proceedings, civil and criminal, the property will be described as the property of the governing body. The section talks of property belonging to the society; but the property is vested in the trustees or in the governing body for the time being. The expression “property belonging to the society" does not give the society a corporate status in the matter of holding or acquiring property, it merely describes the property which vests in the trustees or governing body for the time being. Section 6 gives the society the right to sue or be sued in the name of the president, chairman etc. and 7 provides that no suit or proceeding in a civil court shall abate by reason of the death etc. of the person by or against whom the suit has been brought. Section 8 again says that any judgment obtained in a suit brought by or against the society shall be enforced against it.

The Supreme Court also placed reliance on extracts from Dennis Lloyd’s ‘Law relating to Unincorporated Association’ (1938 edn.) as follows:

Registration does not result in incorporation, but merely entitles the society so registered to enjoy the privileges conferred by the Act. These privileges are of considerable importance and certain of them go a long way toward giving registered societies a status in many respects analogous to a corporation strictly so- called, but without being technically incorporated. Thus something in the nature of perpetual succession is conceded by the provision that the society's property is to vest in the trustees for the time being of the society for the use and benefit of the societies and its members and of all persons claiming through the members according to the society's rules, and further (and this is the most noteworthy provision) that the property shall pass to succeeding trustees without assignment or transfer. In the same way, though the society, being unincorporated, is unable to sue and be sued in its own name, it is given the statutory privilege of suing and being sued in the name of its trustees. Those provisions undoubtedly give certain privileges to a society registered under that Act and the privileges are of considerable importance and some of those privileges are analogous to the privileges enjoyed by a corporation, but there is really no incorporation in the sense in which that word is legally understood.”

The Supreme Court, in light of the aforesaid judgement, has read the status of the entity as that of a corporation in the light of intention to incorporate with disregard to the fact that it possesses the character of the corporation. Status of being a corporation in the said case was linked to it being incorporated under a statute. Therefore, in simple terms, an entity is a corporation if its incorporated, where incorporation is governed by statute or some express provisions, and an entity is not said to be incorporated merely because it possesses privileges as that of a corporation like separate legal entity. Accordingly, societies, though registered, are not corporation or body corporate.

Status of a Society as a Separate Legal Entity

Even if a society is not registered under the Societies Act and is considered as merely an unincorporated society, yet it has privileges similar to that of a corporation. Hence, for the purpose of calling it incorporated for the purpose of Union and State List under the Constitution, it is not a corporation but it is a separate legal entity, as held by the Bombay High Court in Satyavart Sidhantalankar v. The Arya Samaj:

It is significant to observe that the members of the society are a fluctuating body. A member of the society is a person who having been admitted therein according to the rules and regulations thereof has paid the subscription or signed the roll of the members thereof and has not resigned according to the rules and regulations. The governing body of the society is the governors, council, directors, committees, trustees or other body to whom by the rules and regulations of the society the management of its affairs is entrusted. The members as well as the governing body are not always the same and that is the reason why it has been necessary to provide that no suit or proceeding in any civil Court shall abate or discontinue by reason of the person by or against whom such suit or proceedings may have been brought or continued dying or ceasing to fill the character in the name whereof he shall have sued or been sued, but the same suit or proceedings shall be continued in the name of or against the successor of such person. Even though the members of the society or the governing body fluctuate from time to time, the identity of the society is sought to be made continuous by reason of these provisions. The identity of the original members and their successors is one. The liability or obligation once binding on the society binds the successors even though they may not be expressly named, and in this the society savours of the character of a corporation. The resignation or the death of a member does not make any difference to the legal position of the society. The increase or decrease of the members of the society similarly does not make any difference to the position. A partnership under similar circumstances would come to an end, but not the society. The society continues to exist and to function as such until the dissolution thereof under the provisions of the Societies Registration Act. The properties of the society continue vested in the trustees or in the governing body irrespective of the fact that the members of the society for the time being are not the same as they were before nor will be the same thereafter.

The aforesaid judgement succinctly lays down the existence of separate legal entity of a society from its members and the correctness of the same was not overruled in Board of Trustees case (discussed earlier). But, it was held that even though the society has separate legal existence, it nevertheless cannot be said to be a corporation in the sense of being incorporated, and the decision cannot be interpreted to make it a corporation.

In line with the aforesaid judgement, the Department of Corporate Affairs had also notified that society should not be deemed to be a body corporate, although such a society can be treated as a person having separate legal entity apart from its members constituting it.

Applicability of the Doctrine of Corporate Veil to Societies

In the landmark ruling of Salomon v. Salomon, the House of Lords held:

a corporation is separate from the individuals. Only the corporation held the debt; the individual shareholders did not hold the debt. As part of a legal incorporation, the liability was more minimal than that of a partnership or sole proprietorship, according to Examination Preparation Services. 

The case of Salomon v. Salomon gave rise to the legal fiction of corporate veil, enunciating that a company has a legal personality separate and independent from the identity of its shareholders. Hence, any rights, obligations or liabilities of a company are discrete from those of its shareholders, where the latter are responsible only to the extent of their capital contributions, known as "limited liability.

The doctrine of ‘piercing the corporate veil’ stands as an exception to the principle that a company is a legal entity separate and distinct from its shareholders with its own legal rights and obligations. It seeks to disregard the separate personality of the company and attribute the acts of the company to those who are allegedly in direct control of its operation and impose liability upon the persons exercising real control over the said company. The doctrine rests on the recognised principle of separate legal entity. This forms an important constituent of a body corporate/corporation, where to the contrary, a separate legal entity may or may not be a body corporate (as decided in the cases aforesaid). Hence, the doctrine has applicability where the separate legal entity persists, and in the instant case, society though not being a corporation, yet qualifies for being a separate legal entity.

Most of the cases subsequent to the Salomon case, attributed the doctrine of piercing the veil to various grounds such as that the company was mere a ‘sham’ or a ‘façade’. The law has been crystallized around the six principles formulated by Munby J. in Ben Hashem v. Ali Shayif, [2008] EWHC 2380 (Fam) and the same have been reiterated by the UK Supreme Court by Lord Neuberger in Prest v. Petrodel Resources Limited and others, [2013] UKSC 34

The six principles, as found at paragraphs 159–164 of the Ben Hashem are as follows:

1.         ownership and control of a company were not enough to justify piercing the corporate veil;

2.         the Court cannot pierce the corporate veil, even in the absence of third party interests in the company, merely because it is thought to be necessary in the interests of justice;

3.         the corporate veil can be pierced only if there is some impropriety;

4.         the impropriety in question must be linked to the use of the company structure to avoid or conceal liability;

5.         to justify piercing the corporate veil, there must be both control of the company by the wrongdoer(s) and impropriety, that is use or misuse of the company by them as a device or facade to conceal their wrongdoing; and

6.         the company may be a ‘façade’ even though it was not originally incorporated with any deceptive intent, provided that it is being used for the purpose of deception at the time of the relevant transactions.

The Court would, however, pierce the corporate veil only so far as it was necessary in order to provide a remedy for the particular wrong which those controlling the company had done. As noted in Prest:

35. I conclude that there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The Court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company's separate legal personality. The principle is properly described as a limited one, because in almost every case where the test is satisfied, the facts will in practice disclose a legal relationship between the company and its controller which will make it unnecessary to pierce the corporate veil.”

In Life Insurance Corporation of India v. Escorts Ltd. & Ors., (1986) 1 SCC 264, while discussing the doctrine of corporate veil, the Supreme Court held that:

Generally and broadly speaking, we may say that the corporate veil may be lifted where a statute itself contemplates lifting the veil, or fraud or improper conduct is intended to be prevented, or a taxing statute or a beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be, in reality, part of one concern. It is neither necessary nor desirable to enumerate the classes of cases where lifting the 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, the effect on parties who may be affected etc.

Some of the cases decided, in particular relating to a society, with respect to the piercing of corporate veil are notable. In Harbir Singh vs Shaheed Udham Singh Smarak Shiksha Samiti & Ors, the Delhi High Court held that courts should refrain from interfering in the internal management of a society or a club, as they are governed by their own charter, and that the Court should not sit in appeal over the decisions taken by the management and the majority of the society, as long as the court is prima facie satisfied that the said decisions are taken by the persons authorized to do so and as per the rules and regulations of the said society. However, for adequate reasons made out, the court will ignore the corporate veil to reach out to the true character of the concerned company or, in the relevant case, the society.

In A.V. Krishnan Moosad vs The District Collector, the Kerala High Court held that the corporate veil can be pierced when the corporate personality is found to be opposed to justice, convenience and interest of the revenue or workman or against public interest. If it is seen that the society does not have any asset and there are no persons responsible to settle the liability of the society, it is certainly open for the statutory authorities to pierce the corporate veil of the society and to find out the actual persons who are in management of the society and then take steps according to law.

In Madan Mohan Sen Gupta And Anr. vs State Of West Bengal And Ors, the Calcutta High Court was faced with the question whether a corporate veil or the veil of the society, should be lifted to see what sort of a face, statutory or otherwise, it has and under whose control it remains and whether the affairs are purely private or otherwise.

In the light of aforesaid judgements, it can be concluded that the doctrine of lifting of corporate veil has been applied in a restrictive manner, in the scenario wherein it is evident that the company was a mere camouflage or sham deliberately created by the persons exercising control over the said company for the purpose of avoiding liability. Similarly, in case of a society, the grounds where the corporate veil be lifted to disregard the separate legal entity of the board or the society in itself, shall also be based on the principle as enumerated in the leading cases with the intent to seek a remedy for a wrong done by the persons controlling the company.

The Doctrine of piercing of Corporate Veil has gained clarity on its scope and applicability and the principles were also discussed at stretch in the recent case of Balwant Rai Saluja & Anr v. Air India Ltd. & Ors. (2013). However, the applicability of the doctrine is ultimately within the discretion of the courts and is subjective based on the facts and circumstances of each case.

- Munmi Phukon and Sagar Batra


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