Companies Act Archives

Lifting Or Piercing The Corporate Veil: Clarifying The Two-Step Examination

[By Arunoday Rai] The author is a student of National Law School of India University. Introduction The doctrine of lifting or piercing the corporate veil is fundamental to the company law. This doctrine acts as an exception to the concept of a company being a separate juristic entity. It allows the court to treat the rights and liabilities of the corporation as the rights and liabilities of its shareholders. The courts in India have recently tried to expand the horizon of this doctrine to pay regard to the new economic realities behind the evolving corporate structure in the modern era. This article contends that such an expansion of this doctrine has been on a misplaced understanding of Supreme Court (SC) precedents. The courts in India have failed to provide a sound legal basis to expand the contours of this doctrine and have failed to differentiate between various attitudes with which SC has lifted the veil in different cases. It argues that SC has used this doctrine in two types of situations: the first type involves peeping behind/lifting the veil, whereas the second type of cases involves penetrating/piercing the veil. The author sheds light on the confusion caused by the interpretation of the doctrine by the courts due to their lack of understanding of the above-mentioned two-step examination. The Two-Prong Test It is essential to understand what is meant when the courts lift the veil of the company. The doctrine is generally been used to impose liability on the shareholders or alter ego of the company by lifting the veil. However, the two-stage analysis in this post highlights that such a view of the doctrine is incomplete. The act of lifting the veil is not always detrimental to the shareholders/alter ego of the company but can be beneficial at times. Peeping Behind/Lifting the Veil The first stage in the analysis involves the least discussed act taken by the court, where it merely lifts the veil of the company. At this stage, the court lifts the veil of the company to gather information such as shareholding patterns, shareholders, control, etc. It pulls down the veil once such information is gathered and the company is treated as per the information gathered during the inquiry done by the court at this stage. For instance, the statutory lifting of the veil provided in Sections 2(46) and 2(87) of the Companies Act, 2013 is a classic example of this stage. The SC in the case of Renusagar had to adjudicate on the issue whether Renusagar was a power plant owned by Hindalco. If both these entities were considered to have no separate existence, then Hindalco would be entitled to certain exemptions on electricity duty by the State government. The SC lifted the veil to hold that both industries had no independent existence and were inextricably linked up together. The judgment by the SC eventually benefitted the Petitioner’s company as the veil was lifted only to investigate the relationship between both entities involved in this petition. SC has also provided certain prerequisites that need to be fulfilled before the veil is lifted or peeped into. The apex court in LIC v. Escorts had held that a veil can be lifted in various situations such as fraud or improper conduct, evasion of taxing or a beneficent statute, public interest, effect on parties, etc. It did not provide a straight jacket formula but listed broad illustrative situations where the veil could be lifted. However, it went ahead to say that in the present case, no such lifting of the veil is necessitated beyond the governing statutes involved as it is not necessary to the case. Therefore, it should be noted that this stage only involves the court lifting the veil and is a condition precedent to the next stage of penetrating the veil where a court after gathering information may make an order against the company imposing liability on them or refrain from imposing any liability. Penetrating/Piercing the Veil This stage involves the imposition of liability upon the shareholders for the company’s acts through the piercing of the veil. Such liability can be seen through Section 36 of the Companies Act, 2013 where a person who knowingly or recklessly induces persons to invest money can be held liable for action under Section 447 of the Act. This provision is an example of the statutory piercing of the corporate veil where liability is imposed on a person for committing a prohibitive act. The standard for piercing the corporate veil has been subject to contradictory judgments in India. While some courts have held that fraud is a sine qua non for piercing the veil, other courts have held to the contrary. This article supports the former view by underscoring the importance of demonstrating impropriety or evasion of legal obligations as a prerequisite for piercing the veil. It has upheld such a view by recognizing that the law does not allow for imposing liability on mere commonality or interlocking shareholding or common directorships. The requirement of fraud or evasion of a legal obligation is essential to protect the fundamental precept that every company is a distinct legal entity. However, various courts have agreed to the latter view as they have conflated the standards to be used during the two-stage analysis while applying this doctrine. The Confusion Several courts in India have held that the contours of this doctrine cannot be restricted to the requirement of fraud/sham/façade and could be extended to situations where justice, equity, public interest, and convenience so required. The courts that have taken this view have tended to rely on judgments of the SC in LIC v. Escorts and Renusagar which has been interpreted to enlarge the standard of piercing the corporate veil. For instance, the Bombay High Court in Bhatia International has held that the doctrine is no longer restricted to the cases of tax evasion but also pertains to cases that are opposed to justice and convenience. It goes ahead to state that once the court

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Practical Issues in Conducting Virtual Meetings of Shareholders: A Case for Co-operation versus Activism

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[By Gaurav Pingle] The author is a practicing Company Secretary. Corporate governance has always emphasized on building an environment of trust, transparency, and accountability necessary for fostering long-term investment, financial stability, and business integrity. This in turn contributes to supporting stronger growth and more inclusive participation of stakeholders, required especially when the global economy is badly hit due to the COVID-19 pandemic. From the perspective of accountability and transparency, it is desirable that there is regular communication between a company’s management and its shareholders. MCA unveils framework for virtual general meeting An integral aspect of corporate governance is to ensure that owners (i.e. shareholders, in case of companies) should have a right to participate in, and to be sufficiently informed of, decisions concerning fundamental corporate changes. The owners should also have an opportunity to participate effectively and vote in the general meetings. Taking into consideration the critical situation of COVID-19 and nation-wide lockdown where gathering of shareholders physically looks impossible, the Ministry of Corporate Affairs (“MCA”) has unveiled a framework for companies to conduct shareholders’ meeting through video-conferencing (VC) or other audio-visual means taking into consideration the aforementioned important aspects of corporate governance. MCA, through its several circulars and clarifications[i], has prescribed a procedure for conducting shareholders meetings and thereby obtaining their approval. Sending of Financial Statements to shareholders In case of an Annual General Meeting (“AGM”), companies are required to send the financial statements, Auditor’s Report, Directors’ Report to its members. Until now, the companies were sending it by registered post or courier. Owing to the difficulties due to COVID-19 pandemic, where courier services have been suspended owing to the nationwide lockdown, MCA has allowed companies to send the said documents by e-mail to the registered e-mail addresses of the shareholders. One of the major challenges for listed companies is communicating with its shareholders and getting their e-mail addresses registered. In most of the cases, the members are either not traceable or contact details are not updated. Taking into consideration such practical difficulties but at the same time ensuring effective participation, the depositories and registrars are also assisting listed companies in co-ordinating with the shareholders. Listed companies are ensuring that all the shareholders are served with the notice of general meeting. However, it is important to note that under Section 101 of the Companies Act, 2013 (“the Act”) any accidental omission to give notice to, or the non-receipt of such notice by any member shall not invalidate the proceedings of the meeting. MCA has also directed listed companies to publish notice by way of advertisement in two newspapers (preferably having electronic editions) and are also required to disclose necessary information of the AGM through video conference. Voting at general meeting conducted via video-conferencing According to the Securities and Exchange Board of India’s (“SEBI”) principles governing disclosures and obligations of listed entity, shareholders shall be informed of the rules, including voting procedures that govern general shareholder meetings. The shareholders have an opportunity to ask questions to the board of directors, to place items on the agenda of general meetings, and to propose resolutions, subject to reasonable limitations. With this objective, the MCA has directed companies to ensure that such meetings of shareholders are conducted by two-way teleconferencing or Webex with a minimum capacity of at least 1,000 members to participate on a first-come-first-served basis. It would be a herculean task for listed companies in conducting such meetings of shareholders, especially, for the companies whose operations are largely affected by COVID-19. Presently, companies and market intermediaries are developing an online system or platform to ensure that such proceedings of the AGMs are in the proper flow and at the same time shareholders are able to propose resolution(s) and ask questions. A secured system needs to be developed wherein the shareholder can ask questions/counter-questions in the general meeting for a limited time and company management provides their response to the same. The Chairman of the company would also need technical assistance in conducting the AGM through VC. The Chairman would also need the assistance of directors, company secretary, chief financial officer, chief executive officer, etc. in replying to the queries raised by the members. Taking into consideration the overall uncertainty due to COVID-19 and genuine curiosity of investors, it is expected that there would be active participation of investors in the AGM through VC than the regular AGMs convened years before. Passing of resolution by postal ballot and e-voting for approving scheme of amalgamation In one of the cases[ii] before the Bombay High Court, the issue was, “whether the resolution for approval of Scheme of Amalgamation can be passed by a majority of the equity shareholders casting their votes by postal ballot, which includes electronic voting, in complete substitution of an actual meeting.” The High Court observed that at the heart of corporate governance lies transparency and a well-established principle of indoor democracy that gives shareholders qualified, yet definite and vital rights in matters relating to the functioning of the company in which they hold equity. Principal among these is not merely a right to vote on any particular item of business, so much as the right to use the vote as an expression of an informed decision. That necessarily means that the shareholder has an inalienable right to ask questions, seek clarifications, and receive responses before he decides which way he will vote. It may often happen that a shareholder is undecided on any particular item of business. At a meeting of shareholders, he may, on hearing a fellow shareholder who raises a question, or on hearing an explanation from a director, finally make up his mind. Interestingly, the High Court also observed that greater inclusiveness demands the provision of greater facilities, not less, and certainly not the apparent giving of one ‘facility’ while taking away a right. Taking into consideration the observations of Bombay High Court, it will be difficult for corporate restructuring activities of listed companies during this period of COVID-19 and lockdown. Passing of resolution by shareholders’

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