Applicability of the Doctrine of Corporate Veil to Societies

[Post by
Munmi Phukon and Sagar Batra of Vinod Kothari & Company]
Meaning of Corporation
or Body Corporate
Pursuant to Section 2(11) of the Companies Act, 2013 (CA,
2013), “body corporate” or “corporation” includes a company incorporated
outside India, but does not include—
(i)
       a co-operative society registered
under any law relating to co-operative societies; and
(ii)
      any other body corporate (not being
a company as defined in this Act), which the Central Government may, by
notification, specify in this behalf.
However, the definition in CA, 2013 is inclusive and not an
exhaustive one. The term has been elaborated under various judgments and has
been interpreted with reference to the international scenario. A reference may
be drawn to Halsbury’s Laws of England,
3rd Edn. Vol.9, page 4,
which reads:
A corporation aggregate has been defined as a collection of
individuals united into one body under a special denomination, having perpetual
succession under an artificial form, and vested by the policy of the law with
the capacity of acting in several respects as an individual, particularly of
taking and granting property, of contracting obligations and of suing and being
sued, of enjoying privileges and immunities in common, and of exercising a
variety of political rights, more or less extensive, according to the design of
its institution, or the powers conferred upon it, either at the time of its
creation or at any subsequent period of its existence. A corporation aggregate
has therefore only one capacity, namely, its corporate capacity.
An essential element in the legal conception of a
corporation is that its identity is continuous, that is, the original member or
members and its or their successors who are composing it are persons wholly
different from the corporation itself. 
Thus, it has been held that a name is essential to a corporation and that
a corporation can, as a general rule, only act or express its will by deed
under its common seal.
Whether a Corporation
Includes a Society?
A society is united together by mutual consent of its
members to deliberate, determine and act jointly for the same common purpose.
While on a reading of various provisions of the Societies Registration Act,
1860 (Societies Act), a registered society has the privileges analogous to that
of a corporation such as separate legal personality, the power to sue or be
sued, holding separate property, it does not however prove the intention of the
law to provide for the creation of a corporation. The context holds its
authority from the leading case law The Board of Trustees, Ayurvedic
and Unani Tibia College v. The State of Delhi
,
in which the Supreme Court
of India deliberated at length whether the nature of society is that of a
corporation, and analysed the provisions of the Societies Act. The Court, while
interpreting the provisions, held that a society is not a body corporate, by observing:
The most important point to be
noticed in this connection is that in the various provisions of the 
Societies Registration Act, 1860, there are no sufficient words to indicate an
intention to incorporate, on the contrary, the provisions show that there all
absence of such intention. 
Section
2 no doubt provides for a name as also for
the objects of the society. 
Section
5, however states that the property
belonging to the society, if not vested in trustees, shall be deemed to be
vested in the governing body of the society and in all proceedings, civil and
criminal, the property will be described as the property of the governing body.
The section talks of property belonging to the society; but the property is
vested in the trustees or in the governing body for the time being. The
expression “property belonging to the society” does not give the society a
corporate status in the matter of holding or acquiring property, it merely
describes the property which vests in the trustees or governing body for the
time being. 
Section 6 gives the society the right to sue or be
sued in the name of the president, chairman etc. and 7 provides that no suit or
proceeding in a civil court shall abate by reason of the death etc. of the
person by or against whom the suit has been brought. 
Section 8 again says that any judgment obtained in a
suit brought by or against the society shall be enforced against it.
The Supreme Court also placed reliance on extracts from Dennis Lloyd’s ‘Law relating to Unincorporated Association’ (1938 edn.) as follows:
Registration does not result in
incorporation, but merely entitles the society so registered to enjoy the privileges
conferred by the Act. These privileges are of considerable importance and
certain of them go a long way toward giving registered societies a status in
many respects analogous to a corporation strictly so- called, but without being
technically incorporated. Thus something in the nature of perpetual succession
is conceded by the provision that the society’s property is to vest in the
trustees for the time being of the society for the use and benefit of the
societies and its members and of all persons claiming through the members
according to the society’s rules, and further (and this is the most noteworthy
provision) that the property shall pass to succeeding trustees without
assignment or transfer. In the same way, though the society, being unincorporated,
is unable to sue and be sued in its own name, it is given the statutory
privilege of suing and being sued in the name of its trustees. Those provisions
undoubtedly give certain privileges to a society registered under that Act and
the privileges are of considerable importance and some of those privileges are
analogous to the privileges enjoyed by a corporation, but there is really no
incorporation in the sense in which that word is legally understood.”
The Supreme Court, in light of the
aforesaid judgement, has read the status of the entity as that of a corporation
in the light of intention to incorporate with disregard to the fact that it
possesses the character of the corporation. Status of being a corporation in
the said case was linked to it being incorporated under a statute. Therefore,
in simple terms, an entity is a corporation if its incorporated, where
incorporation is governed by statute or some express provisions, and an entity
is not said to be incorporated merely because it possesses privileges as that
of a corporation like separate legal entity. Accordingly, societies, though
registered, are not corporation or body corporate.
Status of a Society as a
Separate Legal Entity
Even if a society is not
registered under the Societies Act and is considered as merely an
unincorporated society, yet it has privileges similar to that of a corporation.
Hence, for the purpose of calling it incorporated for the purpose of Union and
State List under the Constitution, it is not a corporation but it is a separate
legal entity, as held by the Bombay High Court in Satyavart Sidhantalankar
v. The Arya Samaj
:
It is significant to observe that the members of the society
are a fluctuating body. A member of the society is a person who having been
admitted therein according to the rules and regulations thereof has paid the
subscription or signed the roll of the members thereof and has not resigned
according to the rules and regulations. The governing body of the society is
the governors, council, directors, committees, trustees or other body to whom
by the rules and regulations of the society the management of its affairs is
entrusted. The members as well as the governing body are not always the same
and that is the reason why it has been necessary to provide that no suit or
proceeding in any civil Court shall abate or discontinue by reason of the
person by or against whom such suit or proceedings may have been brought or
continued dying or ceasing to fill the character in the name whereof he shall
have sued or been sued, but the same suit or proceedings shall be continued in
the name of or against the successor of such person. Even though the members of
the society or the governing body fluctuate from time to time, the identity of
the society is sought to be made continuous by reason of these provisions. The
identity of the original members and their successors is one. The liability or
obligation once binding on the society binds the successors even though they
may not be expressly named, and in this the society savours of the character of
a corporation. The resignation or the death of a member does not make any
difference to the legal position of the society. The increase or decrease of
the members of the society similarly does not make any difference to the
position. A partnership under similar circumstances would come to an end, but
not the society. The society continues to exist and to function as such until
the dissolution thereof under the provisions of the Societies Registration Act.
The properties of the society continue vested in the trustees or in the
governing body irrespective of the fact that the members of the society for the
time being are not the same as they were before nor will be the same
thereafter.
The aforesaid judgement succinctly lays down the existence
of separate legal entity of a society from its members and the correctness of
the same was not overruled in Board of Trustees case (discussed earlier). But,
it was held that even though the society has separate legal existence, it
nevertheless cannot be said to be a corporation in the sense of being
incorporated, and the decision cannot be interpreted to make it a corporation.
In line with the aforesaid
judgement, the Department of Corporate Affairs had also notified that society
should not be deemed to be a body corporate, although such a society can be
treated as a person having separate legal entity apart from its members
constituting it.
Applicability of the
Doctrine of Corporate Veil to Societies
In the landmark ruling of Salomon v. Salomon, the House of Lords
held:
a corporation is separate from
the individuals. Only the corporation held the debt; the individual
shareholders did not hold the debt. As part of a legal incorporation, the
liability was more minimal than that of a partnership or sole proprietorship,
according to Examination Preparation Services. 
The case of Salomon v. Salomon gave rise to the
legal fiction of corporate veil, enunciating that a company has a legal
personality separate and independent from the identity of its shareholders.
Hence, any rights, obligations or liabilities of a company are discrete from
those of its shareholders, where the latter are responsible only to the extent
of their capital contributions, known as “limited liability.
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 and impose liability upon the persons
exercising real control over the said company. The doctrine rests on the
recognised principle of separate legal entity. This forms an important
constituent of a body corporate/corporation, where to the contrary, a separate
legal entity may or may not be a body corporate (as decided in the cases
aforesaid). Hence, the doctrine has applicability where the separate legal
entity persists, and in the instant case, society though not being a
corporation, yet qualifies for being a separate legal entity.
Most of the cases subsequent to
the Salomon case, attributed the
doctrine
of
piercing the veil to various grounds such as that
the company was mere a ‘sham’ or a ‘façade’.
The
law has been crystallized around the six principles formulated by Munby J. in Ben Hashem v. Ali
Shayif
, [2008] EWHC 2380 (Fam)
and the same have been reiterated by the UK Supreme Court by Lord Neuberger
in Prest
v. Petrodel Resources Limited and others
, [2013] UKSC 34
The six principles, as found at paragraphs 159–164 of the Ben Hashem are as follows:
1.         ownership and control of a company were
not enough to justify piercing the corporate veil;
2.         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;
3.         the corporate veil can be pierced only
if there is some impropriety;
4.         the impropriety in question must be
linked to the use of the company structure to avoid or conceal liability;
5.         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
6.         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.
As noted in Prest:
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.”
In Life Insurance
Corporation of India v. Escorts Ltd. & Ors.
, (1986) 1 SCC 264
,
while discussing the doctrine of corporate veil, the Supreme Court held that:
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.
Some of the cases decided, in
particular relating to a society, with respect to the piercing of corporate
veil are notable. In Harbir Singh vs Shaheed Udham
Singh Smarak Shiksha Samiti & Ors
, the Delhi High Court held that courts
should refrain from interfering in the internal management of a society or a
club, as they are governed by their own charter, and that the Court should not sit
in appeal over the decisions taken by the management and the majority of the
society, as long as the court is prima facie satisfied that the said decisions
are taken by the persons authorized to do so and as per the rules and
regulations of the said society. However, for adequate reasons made out, the
court will ignore the corporate veil to reach out to the true character of the
concerned company or, in the relevant case, the society.
In A.V. Krishnan Moosad
vs The District Collector
, the Kerala High Court held that the
corporate veil can be pierced when the corporate personality is found to be
opposed to justice, convenience and interest of the revenue or workman or
against public interest. If it is seen that the society does not have any asset
and there are no persons responsible to settle the liability of the society, it
is certainly open for the statutory authorities to pierce the corporate veil of
the society and to find out the actual persons who are in management of the society
and then take steps according to law.
In Madan Mohan Sen Gupta
And Anr. vs State Of West Bengal And Ors
, the Calcutta High Court was
faced with the question whether a corporate veil or the veil of the society,
should be lifted to see what sort of a face, statutory or otherwise, it has and
under whose control it remains and whether the affairs are purely private or
otherwise.
In the light of aforesaid
judgements, it can be concluded that the doctrine of lifting of corporate veil has
been applied in a restrictive manner, in the scenario 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. Similarly, in case of a society, the grounds where the corporate
veil be lifted to disregard the separate legal entity of the board or the
society in itself, shall also be based on the principle as enumerated in the
leading cases with the intent to seek a remedy for a wrong done by the persons
controlling the company.
The Doctrine of piercing of
Corporate Veil has gained clarity on its scope and applicability and the
principles were also discussed at stretch in the recent case of Balwant Rai Saluja & Anr v.
Air India Ltd. & Ors.
(2013
). However, the applicability of the doctrine
is ultimately within the discretion of the courts and is subjective based on the
facts and circumstances of each case.
– Munmi Phukon and Sagar Batra

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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