INTRODUCTION
This idea is related to the doctrine of “piercing the corporate veil,” which applies when a shareholder tries to protect their assets from liabilities arising from the corporation’s debt. Certain courts may hold shareholders personally liable for the corporation’s debts and obligations if they have violated the corporate form, as outlined in “Companies Act, 2013”. This concept of reverse piercing of the corporate veil can be related as it talks about the distinct legal entity of a corporation, and can be applied in another context as well.
Reverse piercing of the corporate veil is not an everyday concept in the legal world. However, there is no clear legal framework that determines its appropriateness. The courts have adopted different approaches and made applications to this issue, efforts of making the legal landscape around it still evolving. Not all but some courts do not allow the applicability of reverse piercing of the corporate veil, while others permit it, but only restricted to limited circumstances. The conflict between limited liability and creditors’ ability to collect on their judgments only remains the central challenge in deciding the ultimate cause of whether to use reverse piercing of the corporate veil.
In order to uphold the separation between oneself and their company legally, it is imperative to refrain from utilizing the corporation to avoid personal obligations, engage in certain activities that include fraudulent or criminal acts, or any gains leading to inequitable advantage. In specific jurisdictions, the courts have determined that if the corporate and individual entities are no longer distinguishable, and maintaining that separation would result in an unfair outcome, then it may become necessary for the usage of this method to pierce or even reverse pierce the corporate veil.
HISTORY OF THIS DOCTRINE
This doctrine came into its existence by the decision given by the US Supreme Court in 1956- The W.G Platts case[1], which talks about the property of dispute between husband and wife stating that the plaintiff had made certain obligations upon the husband’s corporation for taking over the shares as the assets to be claimed over the decree of divorce. Further, the court held that the corporation was acting as the alter ego of the husband which is to be specific the alternative personality that did allow the reverse piercing to overlap the decree.
Just after two years, a case took place in the district court of Colorado stated as Shamrock Oil & Gas v. Ethridge[2] which approved this doctrine as mentioned in the words of Arra J, District Judge “the [mere]abstraction of the corporate entity should never be allowed to bar out and pervert the real and obvious truth”[3]. This led to the evolution of this doctrine first in the US legal system where this doctrine turned over cases and became a weapon for the government to collect taxes against the creditors who tried to escape the liability of paying the taxes the leading case law is G.M Leasing Corporation v.US[4].
REVERSE PIERCING OF CORPORATE VEIL IN INDIA
The Indian courts do not show the ease of applying this doctrine. In a case, the judgment given by the court states that the criminal intent of the corporation’s alter ego could be attributed to the corporation[5]. The new ruling made by the Supreme Court states that to prosecute a corporation and impose a fine for the transgression on behalf of the members, regardless of the imposition of statutory punishment by the selected statutes[6]. The application of reverse piercing came into the picture in the case of Aneeta Handa & Ors v. God-father Travels[7], which basically involves section 141[8] which mentions that an individual mens rea can be ascribed towards the company as to which the corporate body gets exposed to the criminal culpability.
The doctrine is basically used in India for the recovery of taxes i.e. owned by the individuals. We all know the Nirav Modi PNB Scam case[9], in which for the recovery of debt the Debt Recovery Tribunal Mumbai ordered him and his group of companies to pay back the loan amount as per this doctrine. The extent of the relationship between the shareholder with its corporation acts as an important factor for the successful application of this principle. The help of Certain factors and circumstances must be taken into so that the court cannot simply act without its vitality.
Apart from its application it first emerged in A.K Khosla v. T.S. Venkatesan[10] defining two essentials as the demand in criminal law to make a prosecution against a person- to a person who has done mens rea and the imposition upon that person for mandatory prison imprisonment. Thus a corporation as per the court cannot be a mens rea because it is significantly a juristic person, not a natural and living one.
Standard Chartered Bank And ors v Directorate Of Enforcement[11] is a landmark case in which it was held by the SC that the corporation can be made liable and punished with fines for the offence committed other than the mandatory punishment as in this case the bank was made liable and prosecuted for the violation of provisions of the said act[12], the SC stayed away for the rules of interpretation and delivered a fair justice by the imposition of a fine on the corporation as of which the rise of this doctrine of reverse piercing came into the jurisprudence of Indian courts.
LIMITS TO PIERCING
The foremost challenge in the reverse piercing of the corporate veil is to determine the appropriate applicable standard for its execution. Certain courts stated that the reverse piercing of the corporate veil should also act like the forward piercing of the corporate veil which shall reveal any wrongful acts and other courts agreed to be with the convenient standards depending upon the unique circumstances of the case. The ability has an impact on the business and other aspects, by which the potential creditors adopt the use of reverse piercing to take all the judgments as discouraging the other entrepreneurs restricting them to form corporations and taking upon the economy. The other aspect talks about the non-applicability of this doctrine resulting in an unfair advantage for the individuals who had used the corporate veil shield for their own safeguarding of their personal assets from creditors. And now if this doctrine is given to the creditors for the assets within the corporation, then there are chances it would create uncertainty and would overshadow the conceptual principles of corporate law. And last, the most bearing risk factor is that this doctrine could also be used for harassment and intimidation, the usage of threats by the creditors with the help of this doctrine to settle down disagreements or to comply with unfavourable terms even beyond the scope of the legal obligations.
CONCLUSION
This doctrine is still in its stage of progress and has not completely evolved and the courts have different opinions with this approach. There are many significant factors for the application of this doctrine upon the corporation held by an individual causing an effecting factor to harm the creditors of the corporation. But keeping this aside there are certain limitations with this doctrine by which there will be a fair serving of justice wherever it is necessary and the individuals to be held liable for the acts. The applicability of this doctrine must be permitted in arising situations and its proper usage on the cause especially in compliance with the law and provide a safeguard to the creditors.
Author(s) Name: Mohammed Fardeen Yusuf (Pondicherry University)
References:
[1] Platts, Inc. v. Platts 49 Wn.2d 203 (1956)298 P.2d 1107.
[2] Shamrock Oil and Gas Co. v. Ethridge 159 F. Supp. 693 (D. Colo. 1958) (Justia US Law)
<https://law.justia.com/cases/federal/district courts/FSupp/159/693/2343894/> accessed on 5th August 2023.
[3] Ibid
[4] G.M Leasing Corporation v.US 429 U.S. 338 (1977)
[5] Iridium India Telecom Ltd vs Motorola Incorporated & Ors (2011) 1 SCC 74
[6] Standard Chartered Bank v. Directorate of Enforcement AIR 2005 SC 2622
[7] Aneeta Handa & Ors v. God-father Travels SC No 838 of 2008
[8] Negotiable Instruments Act, 1881
[9] Punjab National Bank Scam (Wikipedia) <https://en.wikipedia.org/wiki/Punjab_National_Bank_Scam> accessed on 7th August 2023.
[10] (1992) 1 CALLT 77 HC, 1991 (2) CHN 321, 1994 80 CompCas 81 Cal, 1992 CriLJ 1448
[11] Standard Chartered Bank and ors v Directorate Of Enforcement and ors AIR 2005 SC 2622.
[12] Foreign Exchange Regulation Act, 1973 (“FERA”).
