It is widely acknowledged that a corporate has a limited liability as corporate enjoys the status of an artificial person and owner and corporate entity is considered to have a separate and distinct legal entity. So there is a veil or shield between owners and corporate that protects the shareholders from any personal liability for any debts, and liabilities of the corporation. This personal liability “shield” for shareholders is so called corporate “veil”. But the court has to derecognize the separate identities of individual and corporate entities at the time of corporate abuse and lift this, not so absolute veil. There is a derivation of lifting of corporate veil called reverse piercing. While traditional veil piercing holds an individual shareholder liable for the acts of a corporation, reverse piercing imposes liability on a corporation for the obligations of an individual shareholder. In other words, it allows the owners personal debts to be satisfied from entity's assets. The creditor seeks to pierce the corporate veil to seize an entity’s assets in order to satisfy the debt of owners.

This concept was initially recognized in US in Curci Investments v. Baldwin case where the court applied the doctrine to a Delaware LLC for loan recovery from Baldwin and his wife. So it is believed that as long as no innocent parties are harmed, a creditor of a shareholder of a Limited liability corporation be allowed to step into the shoes of a shareholder and recover his dues by imposing the controller's liability on the corporation controlled in the same way we put the corporation's liability on the controller under traditional veil piercing.

Different Types of Reverse Piercing

Reverse piercing cases can be brought up by outsider as well as insider. Based on this, reverse piercing can be categorized as:

Insider reverse piercing is when an insider of the parent corporation, or the parent itself, seeking to pierce the parents corporate veil as it's advantageous to pierce its own veil. For example, in workers' compensation disputes where the subsidiary employer was protected from lawsuits and the employee tried to make the parent company liable for additional damages, parent companies have attempted to penetrate their own veil.

The second type is outsider reverse piercing, where a creditor of the parent seeks to hold the subsidiary liable as in Shamrock Oil & Gas v. Ethridge. The same standard that would be used if the subsidiary's distinct existence were being contested will often be applied by courts when considering outsider reverse piercing allegations. In a U.S. case, Acree v. McMahan, Court held that outsider reverse veil-piercing extends the traditional veil-piercing doctrine to permit a third- party creditor to pierce the veil to satisfy the debts of an individual out of the corporation's assets. The Court of Appeals affirmed, that the concept of reverse piercing of the corporate veil is applicable in Georgia to remedy injustices which arise can occur when a party abuses his privilege by using a business company to thwart the court system, commit fraud, or escape legal or tort liability. So the essence of corporate veil piercing whether forward or Reverse is to achieve the equitable result.

Philippines Supreme Court has also recognized that the creditor can still seize the assets of a corporation to satisfy the personal obligation of a stockholder applying the doctrine of Reverse Corporate Piercing. The lessee in this case owed his lessor rental arrears and share in realty taxes. When the court ordered the lessee to pay various sums of money representing unpaid arrears, realty taxes, penalty and attorney’s fee, the lessee formed a corporation and transferred his real property in the name of the corporation. The court justified the application of the Reverse Corporate Piercing and enforced the levy on execution of the real property, held in the name of the corporation to conceal the assets. To fulfill a stockholder's personal debt, a creditor may nonetheless claim a corporation's assets.

Relevance of Doctrine in India

The doctrine of piercing of corporate veil is invoked by Indian Courts on the basis of Alter ego theory and Instrumentality theory. One of the ways to pierce the corporate veil is through the theory of alter ego. That means the court has to look into the fact that whether the shareholders has maintained a separate identity than that of the company. If the parity is found that means its a sham used to perpetrate fraud. So the separate and distinct legal entity of the company can be set aside when it is found to be so dominated by unity of interest and it mainly transacts the dominators business rather than its own. The instrumentality theory is where the company's directors use its corporate personality for their own benefit instead of using it for the benefit of the company.

The doctrine of “reverse” piercing originated in US to meet more equitable needs in the case of non-payment of dues. But in India it’s not widely accepted and employed and has shown inordinate reluctance with so many inadequacies. The doctrine of reverse piercing has not been explicitly and completely applied by the Indian court in any instance, nor have any rules for its use been established. However there has been an evolution in the approach of courts with time. Some of the Court cases recognizing this can be seen as follows.

Case of Iridium India Telecom Ltd. v. Motorola Incorporation: The issue of corporate criminal liability of the company was settled in this case. In this case Iridium had filed a criminal complaint against Motorola for conspiracy and cheating under the Indian Penal Code. The Supreme Court (“SC”) which framed two issues: Can the firms be held legally liable for their actions if, first, they had mens rea? Second, what is the legal consequence for false claims made in connection with private securities offers made to particular investors? The SC fixed the corporate criminal liability of the company on the principle of attribution which is to invoke to ascertain the identity of individual in the company whose mental element will be attributed to the company for fixing criminal liability. The court ruled that principle of mental element needed to be attributed to the company to invoke the criminal liability on the person who is in direct control of the company and that the corporations can no longer claim immunity from punishments under those offences, which require mens rea. Therefore, it was said that mens rea is assigned to the corporation on the basis of alter ego and that it does not apply in opposite situations when vicarious liability is attributed to those involved in the firm's business.

Most evolutionary case in Indian scenario is regarded as Standard Chartered bank v. Office of Directorate, here the writ was filled with High Court of Bombay contending that no criminal proceedings can be initiated against the appellant-company for the offence under Section 50 read with Section 51 of the Foreign Exchange Regulation Act, 1973. The issue was whether a company, which is a Juristic person, could be prosecuted for offences for which the sentence of imprisonment is a mandatory punishment? And whether the court has got the discretion to impose the sentence of fine or Imprisonment or fine alone? The court said that a provision which is “imprisonment and fine” cannot be read as “imprisonment or fine” as it will amount to rewriting of the section which definitely is not the prerogative of the court because then it shall lead to the interpretation of a statute which could vary with the factual matrix. It was decided by the Supreme Court of India that on the question whether a corporation could be prosecuted for offences in which the punishment is imprisonment, which shall be a mandatory punishment by law. There is no warrant for the assumption that the value of punishment reduces to zero merely because it is impossible in case of a corporate offender. The Court in India now has finally recognized that a corporation can have a guilty mind. It observed that a person in control of the company is responsible for the conduct of the company and hence guilty for any contravention of provisions of law and criminal liability of the corporation will also arise. So the requisite provisions in the laws to be framed for commissioning of crime against corporates by adopting the principles of Attribution and Imputation.

Reverse piercing was also strongly pleaded in SBI v. Kingfisher Airlines, a case by a consortium of banks for recovery of debt from Vijay Mallya before the Debt Recovery Tribunal, Bangalore. The said disclosure was sought for attaching properties of Vijay Mallya and its companies as Mallya is a chief promoter, and had controlling interests in the defendant companies.

Conclusion

In its early stages, India was not very receptive to the notion of alter ego or the imputing of criminal culpability to companies. However, according to recent cases and their rulings, a corporation can be found guilty of both statutory and criminal offences because the mens rea in criminal culpability can be imputed to the corporation. However, it is still unclear how a corporation will be held criminally liable on its own when the directors who have been named in the MOA have not been found guilty of the crime.

In the evolving era of technology and crimes, individuals and corporations have been committing white collar crimes to maximize their profits with each other support and knowledge. And such profits are earned at the expense of a particular class of innocent shareholder, competitors and general public at large. Despite of increasing rates of crimes, the corporation being a juristic person is absolved of all criminal since ages. The reason could be attributed to:

- That corporations cannot commit an offence on its own, lacking mens rea; and that corporations cannot be imprisoned being Juristic person and laws valid only to fines.

And thus this encourages corporations to commit frauds every now and then. The reasoning in criminal law pertaining to the imposition of criminal liability on corporations is based on the notion that corporations are capable of committing crimes and can, thus, be held criminally liable. The fact that Indian law is not evolving to reflect these changes demonstrates that companies are not subject to criminal accountability. Even if they did, the statutes and judicial interpretations only imposed fines. In addition to fines, penalties may include company dissolution, interim corporate closure, significant victim compensation, exploitation of the company's goodwill, etc. the sole objective of punishment under criminal law would be accomplished through such methods of punishment.

References

  1. Aron Salomon v. A. Salomon & Co. Ltd. AC 22 1897.
  2. Balakrishnan, K., Corporate criminal liability - Evolution of the concept, 22(3), Cochin University Law Review, 255-277, (1998).
  3. Curci Investments, LLC V. Baldiwin, 14 CAL. APP. 5TH 214.
  4. Sandra Feldman, How to avoid piercing the corporate veil between parent corporations and their subsidiaries,WOLTERZ KLUWER, ( 25 Mar. , 2022), https://www.wolterskluwer.com/en/expert-insights/how-to- avoid-piercing-the-corporate-veil-between-parent-corporations-and-their-subsidiaries.
  5. See also Naman Kamdar & Akash Srinivasan, Solving the bad loan crisis in the unconventional way: Is reverse piercing the corporate veil a solution, 12(2), NUJS L. REV. (2019).
  6. Shamrock Oil and Gas Co. v. Ethridge, 159 F. Supp. 693 (1958).
  7. Acree v. McMahan, 574 S.E.2d 567 (2002).
  8. International Academy of Management and Economics v. Litton and Co., Inc., G.R. No. 191525, December 13, 2017.
  9. Iridium India Telecom Ltd. v. Motorola, (2005) 2 SCC 145.
  10. Umakanth, V. & Naniwadekar, M., Corporate Criminal Liability and Securities offerings: Rationalizing the Iridium-Motorola Case: Iridium India Telecom Ltd. v. Motorola Incorporated & Ors., 28 (2), National Law School of India Review, 144–167, (2013).
  11. Standard Chartered bank v. Office of Directorate, (2006) 4 SCC 278.
  12. SBI v. Kingfisher Airlines Ltd. (2017) 6 SCC 654 (India).
  13. Vishal Gera & Pierre Uppal, Worldwide: Alter Ego: Judges And Punishes ,Mondaq, ( Jan. 13 2020), https://www.mondaq.com/india/shareholders/882646/alter-ego-judges-and-punishes.
  14. Aquib Rouf, The Holistic and Modern Approach of Lifting the Corporate Veil and Its Judicial Interpretation in Present Day Scenario, 4 INT'l J.L. MGMT. & HUMAN. 1440 (2021).
  15. Mishika Bajpai & Anish Vohra, Deeming Fiction: The Statutory Intendment of Affixing Corporate Criminal Liability in India, 4 Christ U. L.J. 55 (2015).

About the Author: This post is prepared by Harshita Jain, Law student at National Law University, Jodhpur. She can be reached at harshita.jain@nlujodhpur.ac.in

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