Facts of the case:
- Manu Maheshwari (Respondent) had given a loan of Rs. 52,00,000 @ 24% interest to M/s. Independent Disk Mastering, Private Limited (company) through account payee cheque in the name of the company on the request and persuasion by the directors of the company (petitioners) for smooth functioning of business.
- The company could not return it in time, as a result Shri Manu Maheshwari instituted a suit for recovery of Rs. 74,34,446/- against Company and its three Directors in trial court.
- Petitioners filed an application under Order I Rule 10 CPC in November 2014, inter alia, seeking deletion of their names from the array of parties on the ground that they were merely Directors in the Company and the Company had taken loan as a separate legal entity as also that there were no personal allegations of mala-fide or fraud against them and they were not personally liable.
- Subsequent to the filing of the said petition, respondent filed an application seeking amendment of the plaint to include allegations against petitioners for lifting of the corporate veil of the Company. However, this application was subsequently withdrawn by respondent.
- By the order dated 27.07.2018, Trial Court has dismissed the application filed by petitioners under Order I Rule 10 CPC, saying that “In view of the above facts and circumstances, it is directed that petitioner shall not be deleted as parties to the present suit at this stage.
- Further aggrieved by order of Trial Court petitioners filed a revision petition.
- The question of law for discussion here is whether the Trial Court was justified in dismissing the application seeking deletion of petitioner’s name from array of parties by applying the doctrine of lifting the corporate veil.
Arguments on behalf of Respondents:
- Petitioners were directors and principal officers of the Company and in-charge and responsible for its day-to-day affairs and thus jointly and severally liable and responsible for the acts done on behalf of the Company.
- It has been averred that petitioner had jointly and personally requested and persuaded the respondent for the financial assistance/ help for smooth functioning of the business of Company. Therefore, their presence is required for adjudication of the suit. So, they shall not be struck off as parties from the suit.
- Further quoted one judgement[1] of Delhi HC in which it has been held by the Hon’ble High Court of Delhi that there is no doubt about the fact that a company is a separate legal entity and has a distinct identity from Directors but this protection afforded to the Directors of the company is not ironclad or impenetrable. In reality, individuals/persons are the ones, who run the company in the hope of reaping benefits out of it. In a case where a court determines that a company’s business was not conducted in accordance with the provisions of corporate legislation, it can pull up the “corporate veil” and discover the true culprit. This lifting of corporate veil’ is essential for the purpose of determining the persons who are liable for any fraudulent or unlawful practices done in the garb of running a corporate body.
- It was argued that Petitioners were Directors of the Company as on 16.01.2012, when the suit was filed against the Company.
- Further argued that One of the petitioners resigned as Director on 28.12.2015 while other resigned on 20.11.2012. This was a deliberate act to avoid the liability of payment to the Plaintiff.
- New directors of the company stand disqualified by ROC under Section 164(2) of the Companies Act from 01.11.2017 to 31.10.2022. Information also reveals that the Company has been ‘struck off’ from the MCA. Summary of accumulated losses shows that the Company has been incurring losses from 2017, while the loss for the year 2013-2014 was Rs.25,39,771/-. In these circumstances, if petitioners are deleted from the array of parties and the decree is passed in favour of the Plaintiff, it will become in executable.
- it was also argued by learned counsel for the Respondent that the application filed by the petitioners under Order I Rule 10 CPC for their deletion was misconceived and has been rightly dismissed by the Trial Court.
Arguments on behalf of petitioners
- Petitioners had filed one written statement before trial court wherein it is pleaded that Company is a corporate body incorporated under Companies Act and has a separate and independent legal entity from the directors.
- Further Ld. Council of petitioner contended that the impugned order is unsustainable in law as the Trial Court failed to appreciate that there were no allegations against petitioners in the plaint and a bare reading of the plaint would show that Plaintiff was seeking to recover an amount, which was allegedly given to the Company at the highest, at the request of the said Defendants.
- There was no contract between the petitioner and respondent as the alleged loan was given by an Account Payee cheque in favour of the Company.
- It was contended that Directors of the Company cannot be made personally liable for the outstanding dues and liabilities of the Company, unless they have given a guarantee, indemnity etc. or there are allegations of fraud etc.
- Trial Court failed to appreciate that liability of a Director of a Company, under law, is confined in case of malfeasance and misfeasance and/or the actions of the Directors amount to an act under the law of tort towards those whom they owe a duty to care i.e. discharge fiduciary obligations.
- further contended that the presence of petitioners was not required for adjudicating the disputes between Plaintiff and the Company and therefore they are neither necessary nor proper parties and ought to have been deleted from the array of parties on an application filed by them on the principles underlying the provisions of Order I Rule 10 CPC.
- In any event, an apprehension of being unable to execute a decree in future is not a good enough reason, in law, to make the existing or erstwhile Directors party to the suit, by lifting the corporate veil.
Held:
- The doctrine of lifting of corporate veil (doctrine) is 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 discards the separate entity of the Company and attributes the acts of the Company to those who are in direct control of its operations
- Further referred judgement[2] wherein six principles were crystallized for applying the said doctrine which 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 ‘facade’ 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.
- Further stated that, it has to be borne in mind that the doctrine of Lifting of Corporate veil is not available in every case of alleged liability against a Company. It is only available in restricted cases and limited circumstances, where it is permissible to so do under a Statute or where the corporate structure has been instituted to perpetuate a fraud or is a camouflage, facade or sham to avoid liability or in a case where effect has to be given to a beneficial Legislation. These can be broadly outlined as instances where the corporate veil can be lifted, though it cannot be said that this is an exhaustive list.
- Allegations in plaint do not refer to any transaction with petitioners in their personal capacity apart from stating that they were known to the Plaintiff in a friendly capacity. Although it is claimed that the money was advanced as loan due to personal relation with petitioners, it is undisputed that the transaction was directly with the Company and loan was advanced in the name of the Company by a cheque.
- There is no allegation of fraud levelled against petitioners and nor is there any averment that the corporate structure was created as a mere facade or camouflage to avoid liabilities. It is also not the case of the Plaintiff that the Directors were personal guarantors to the loan transaction or had assured to indemnify the amount.
- Learned counsel for the Respondent had also sought to argue that since petitioners have resigned, the decree, if passed in favor of the respondent, would be in executable. Suffice would it be to state in this regard that it is always open to summon the Directors as witnesses. In any case, the respondent is not remediless in executing the decree against the Company and as pointed out by counsel for petitioners, Respondent had already filed an application under Order XXXVIII Rule 5 CPC, which is pending adjudication before the Trial Court.
- The averments made in the plaint, in my view, do not justify the lifting of the corporate veil to make the Directors personally liable. The cryptic observation of the Trial Court, that the facts and circumstances of the case attract the principle of lifting the corporate veil, is not supported by the pleadings and I may also note that the order does not even give any reasons for having so held.
- the impugned order is totally unsustainable. The Trial Court has without any reasoning, declined to delete petitioners name against the well settled law on lifting the corporate veil. This is a clear material irregularity
- In view of the above, present Revision Petition is allowed. The order of the Trial Court dated 27.07.2018 is hereby set aside and name of petitioners are deleted from the array of parties in the suit. The Trial will henceforth proceed accordingly.
[1] M/s. Red Zebra Gift Promotion P. Ltd & Anr Vs. Purnavi Events P. Ltd’.
[2] In Ben Hashem vs Ali Shayif (2008) EWHC 2380 (Fam)