Under Section 58(2) of the Companies Act, 2013 the securities or interest of any member in a public company are freely transferable. However, under Section 58(4), it is open to the public company to refuse registration of the transfer of the securities for a sufficient cause. To that extent, Section 58(4) has to be read as a limited restriction on the free transfer permitted under Section 58(2). Section 10-F of the Companies Act, 1956, provides that an appeal against an order passed by the Company Law Board can be filed before the High Court on questions of law. Right to refuse registration of transfer on sufficient cause is a question of law and whether the cause shown for refusal is sufficient or not in a given case, can be a mixed question of law and fact. Mackintosh Burn Ltd. v. Sarkar and Chowdhary Enterprises Private Ltd., (2018) 5 SCC 575.
Category Archives: Corporate Law
Black’s Law Dictionary defines “resolution” as a main motion that formally expresses the sense, will, or action of a deliberative assembly. Advanced Law Lexicon by P.Ramanatha Aiyar, inter alia, provides that “a resolution is a procedural means available to the members of the Parliament or the State Legislature and the Ministers to raise a discussion in a House on a matter of public interest. It is a substantive motion. It is in the form of a declaration of opinion or a recommendation or in the form so as to record either approval or disapproval by the House of….”The underlying principle of a valid resolution is that it must be the expression of collective will of the resolving body. It is for this purpose that an agenda of the meeting is circulated amongst all members to enable them to participate in the meeting. Invite to all members of the general body to participate in a meeting is essential to ensure that the resolution should be passed unanimously or that each member must be present at the time of voting. What it means is that it should be passed with opportunity to all members to deliberate on the issue. A member may, or may not, participate in a meeting that is his choice. But an invitee must nevertheless be there for him to attend the meeting so that he has opportunity to deliberate on the issue. Board of Trustees v. Registrar, 2018 (126) ALR 296.
In the case of M/s Videocon International Ltd. v. S.E.B.I., (2015) 4 SCC 33 a right of appeal has been understood to be a substantive right and not a mere procedural right so as to affect it’s applicability upon any amendment. The forum of appeal as provided under Section 483 of the Companies Act would not stand altered as no such provision in such a situation is contemplated so as to transfer the right of appeal before the Company Appellate Tribunal.
The enforcement of Section 303 of the Companies Act w.e.f. 15.12.2016 would not repeal the right or abrogate the right of a person to file an appeal against the order of a learned Single Judge in a company petition for which the High Court continues to have jurisdiction to decide the matter. The Company Appellate Tribunal has not been conferred with any such authority specifically as an alternative, granting a right of appeal as against an order of a learned Single Judge passed in a company petition. In the absence of any such specific conferment of power on the Company Appellate Tribunal the powers statutorily granted under Section 483 of the Companies Act would stand revealed, cannot be repealed. The doctrine of implies repeal, therefore, will have no application in view of the aforesaid background of the legislation as no such express intention can be gathered from the same. J.R. Organics Ltd. v. Jupiter Dyechem Pvt. Ltd., 2017 (1) AWC 751.
The principle of lifting the corporate veil as an exception to the distinct corporate personality of a company or its members is well recognized not only to unravel tax evasion, CIT v. Sri Meenakshi Mills Ltd., AIR 1967 SC 819 but also where protection of public interest is of paramount importance and the corporate entity is an attempt to evade legal obligations and lifting of veil is necessary to prevent a device to avoid welfare legislation, Workmen v. Associated Rubber Industry Ltd., (1985) 4 SCC 114.
The concept of “piercing the veil” in the United States is much more developed than in the U.K. The motto, which was laid down by Sanborn, J and cited since then as the law, is that “when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons”. The same can be seen in various European jurisdictions.
In Palmer’s Company Law, this topic is discussed in Part II of Vol. 1. Several situations where the court will disregard the corporate veil are set out. The eighth exception runs as under:
‘the courts have further shown themselves willing to “lifting the corporate veil” where the device of incorporation is used for some illegal or improper purpose….where a vendor of land sought to avoid the action for specific performance by transferring the land in breach of contract to a company he had formed for the purpose, the court treated the company as a mere “sham” and made an order for specific performance against both the vendor and the company.’
It is thus clear that the doctrine of lifting the veil can be invoked if the public interest so requires or if there is allegation of violation of law by using the device of a corporate entity. State of Rajasthan v. Gotan Lime Stgone Khanij Udyog Pvt. Ltd., (2016) 4 SCC 469.
The Companies Act in India and all over the world have statutorily recognised subsidiary company as a separate legal entity. Section 2(47) of the Companies Act, 1956 (for short “the 1956 Act”) defines “subsidiary company” or “subsidiary”, to mean a subsidiary company within the meaning of Section 4 of the 1956 Act. For the purpose of the 1956 Act, a company shall be, subject to the provisions of sub-section (3) of Section 4, of the 1956 Act, deemed to be subsidiary of another. Sub-section (1) of Section 4 of the 1956 Act further imposes certain preconditions for a company to be a subsidiary of another. The other such company must exercise control over the composition of the Board of Directors of the subsidiary company, and have a controlling interest of over 50% of the equity shares and voting rights of the given subsidiary company.
In a concurring judgment by K.S.P. Radhakrishnan, J., in Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613 the following was observed:
“Holding company and subsidiary company
257. The legal relationship between a holding company and WOS is that they are two distinct legal persons and the holding company does not own the assets of the subsidiary and, in law, the management of the business of the subsidiary also vests in its Board of Directors. …
258. Holding company, of course, if the subsidiary is a WOS, may appoint or remove any Director if it so desires by a resolution in the general body meeting of the subsidiary. Holding companies and subsidiaries can be considered as single economic entity and consolidated balance sheet is the accounting relationship between the holding company and subsidiary company, which shows the status of the entire business enterprises. Shares of stock in the subsidiary company are held as assets on the books of the parent company and can be issued as collateral for additional debt financing. Holding company and subsidiary company are, however, considered as separate legal entities, and subsidiary is allowed decentralised management. Each subsidiary can reform its own management personnel and holding company may also provide expert, efficient and competent services for the benefit of the subsidiaries.”
In Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613 further made reference to a decision of the US Supreme Court in United States v. Bestfoods ,141 L Ed 2d 43 : 524 US 51 (1998). In that case, the US Supreme Court explained that as a general principle of corporate law a parent corporation is not liable for the acts of its subsidiary. The US Supreme Court went on to explain that corporate veil can be pierced and the parent company can be held liable for the conduct of its subsidiary, only if it is shown that the corporal form is misused to accomplish certain wrongful purposes, and further that the parent company is directly a participant in the wrong complained of. Mere ownership, parental control, management, etc. of a subsidiary was held not to be sufficient to pierce the status of their relationship and, to hold parent company liable.
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. The starting point of this doctrine was discussed in the celebrated case of Salomon v. Salomon & Co. Ltd.,1897 AC 22 : (1895-99) All ER Rep 33 (HL). Lord Halsbury LC, negating the applicability of this doctrine to the facts of the case, stated that:
“a company must be treated like any other independent person with its rights and liabilities legally appropriate to itself … whatever may have been the ideas or schemes of those who brought it into existence.”
Most of the cases subsequent to Salomon case,1897 AC 22 : (1895-99) All ER Rep 33 (HL) , attributed the doctrine of piercing the veil to the fact that the company was a “sham” or a “façade”. However, there was yet to be any clarity on applicability of the said doctrine.
In recent times, the law has been crystallised around the six principles formulated by Munby, J. in Ben Hashem v. Ali Shayif, 2008 EWHC 2380 (Fam) . The six principles, are as follows:
(i) Ownership and control of a company were not enough to justify piercing the corporate veil;
(ii) 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;
(iii) The corporate veil can be pierced only if there is some impropriety;
(iv) The impropriety in question must be linked to the use of the company structure to avoid or conceal liability;
(v) 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
(vi) 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.
The principles laid down by Ben Hashem v. Ali Shayif, 2008 EWHC 2380 (Fam) have been reiterated by the UK Supreme Court by Lord Neuberger in Prest v. Petrodel Resources Ltd. (2013) 2 AC 415 : (2013) 3 WLR 1 : 2013 UKSC 34 , as follows:
“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.”
The position of law regarding this principle in India has been enumerated in various decisions. A Constitution Bench of the Court in LIC v. Escorts Ltd,(1986) 1 SCC 264 , while discussing the doctrine of corporate veil, held that:
“90. … 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.”
Thus, on relying upon the aforesaid decisions, the doctrine of piercing the veil allows the court to disregard the separate legal personality of a company and impose liability upon the persons exercising real control over the said company. However, this principle has been and should be applied in a restrictive manner, that is, only in scenarios 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. The intent of piercing the veil must be such that would seek to remedy a wrong done by the persons controlling the company. The application would thus depend upon the peculiar facts and circumstances of each case. Balwant Rai Saluja v. Air India Ltd., (2014) 9 SCC 407