The Curious Case of Reverse Company Veil Piercing and the IBC – The RMLNLU Legislation Overview Weblog

By: Rashi Sharma and Vijpreet Pal


Fraud unravels every part‘ – Lord Denning

INTRODUCTION

Company enterprises have been accorded an impartial authorized standing to serve the underlying targets of justice. Though, with time, Benami transactions, frauds, and cash transfers into the corporate’s account have been all used to evade accountability. The need to control such malpractices amongst shareholders and defend the hard-earned cash of the buyers arose because of these fraudulent shareholder transfers, giving rise to the notion of reverse company veil piercing, (‘reverse piercing’). The thought refers to a state of affairs when a creditor of a company makes an attempt to carry the company accountable for the shareholders’ money owed. Though new, the thought of ​​reverse piercing is a contentious space of ​​company regulation. For financial progress, a company’s impartial authorized existence have to be safeguarded, nonetheless, when that kind is employed by people to keep away from present liabilities, the courtroom could apply basic or reverse piercing of the veil. In India, the notion of reverse piercing is unaccepted, as no instances have been filed during which a courtroom has successfully imposed the private culpability of a shareholder on the corporate by reverse piercing.

This text illustrates how this doctrine has emerged and the way it may be included into the Indian insolvency regime whereas delineating the challenges related to its software within the insolvency decision course of. Moreover, this text additionally places forth suggestions primarily based on the present insolvency regime, whereas preserving in thoughts the bigger public curiosity in recovering the financial system from the upcoming disaster. The authors declare that reverse piercing beneath the Indian insolvency regulation requires thorough consideration and shouldn’t be rejected outright.

EMERGENCE OF THE DOCTRINE OF REVERSE PIERCING IN INDIAN JURISPRUDENCE

In India, the courts have proven an uncommon hesitation to simply accept this doctrine, which might be demonstrated by their method earlier than 2005. Throughout this time, courts needed to cope with a substantial variety of instances during which companies have been accused of crimes that required legal prosecution . It was determined that an organization couldn’t be subjected to a compulsory time period of imprisonment, accordingly, the only real sanction can be fantastic. Nonetheless, the courts have been nonetheless skeptical to carry an organization accountable for the money owed or fraudulent actions of these in cost.

Nevertheless, for the needs of this doctrine, the thought of ​​alter-ego was progressively acknowledged by the courts. Whereas making use of the notion of alter ego in Iridium India Telecom Ltd v. Motorola Incorporation and Ors., the courtroom said that the legal intent of the company’s alter ego may very well be attributed to the company.

Furthermore, within the Commonplace Chartered Financial institution v. Directorate of Enforcement case, the Supreme Court docket declared {that a} company might be prosecuted and punished for the transgressions with fines on behalf of its members, impartial of the statutory punishment imposed beneath related statutes. Additional, this stance was clarified in Aneeta Handa & Ors. v. God-father Travels, a case involving part 141 of the Negotiable Devices Act, 1881, which supplies the inference that people’ mens rea might be ascribed to the corporate to show the company physique to legal culpability. This was the primary time the reverse piercing principle was launched into Indian jurisprudence.

Within the latest case involving case Kingfisher Airways, it was proposed to unite all the group firms on one platform and use Mallya because the widespread denominator to impose accountability to settle dues to the Industrial Improvement Financial institution of India. The same plea was introduced within the Skippers Builders case when property owned by Tej Properties Pvt. Ltd. was connected to fulfill the money owed of Mr. Tejwant Singh, the corporate’s managing director. Subsequent, even within the Nirav Modi PNB Rip-off Case, the Debt Restoration Tribunal Mumbai stationing on the rules of this doctrine ordered him and his group of firms to repay the due quantity. Although the courtroom didn’t use the categorical time period ‘reverse piercing’ in all these instances, the circumstances present that the doctrine was utilized.

INCORPORATION OF THE DOCTRINE AND THE INDIAN INSOLVENCY REGIME

The Insolvency and Chapter Code (hereinafter ‘Code’) doesn’t expressly acknowledge the precept of the reverse company veil, nonetheless, it’s not utterly excluded from its ambition. To grasp the identical, it’s related to first element the implication of the company veil and its piercing beneath the Code. In its landmark resolution of Arcelor Mittal India Pvt. Ltd. v. Satish Kumar Gupta, the Supreme Court docket acknowledged that part 29-A imports the corporate regulation idea of company veil piercing because it permits to establish who’s answerable for the entity (on the time of submitting the decision plan). Moreover, in instances involving group insolvency, the precept of the company authorized entity is seen to carry relevance. Though group insolvency is just not statutoryly recognized beneath the Code, Indian courts acknowledged its software and have prior to now discarded the separate authorized entities of the entities concerned within the group. As an illustration, within the Videocon insolvency, the courtroom rejected the separate authorized entity of the holding firms to permit consolidation of their belongings with the mother or father firm. Thus beneath the Indian insolvency jurisprudence, company veil piercing has been a longtime apply.

There being a paucity of judicial precedents indicating the Indian courts’ approaches to the reverse company piercing of the veil, sure situations can warrant a 3rd get together to hunt a decision by stretching the defend of a particular depart petition. As an illustration, collectors in search of to get better their money owed from the company debtor could try and get better the money owed from the entities owned and managed by the administration of the company debtor.

Presently, beneath the Indian insolvency regulation, collectors can transfer towards the company debtor or the private guarantor of the company debtor for restoration. The truth is, in Lalit Kumar Jain v. Union of India & Ors. held that the private guarantor is just not discharged of the duty even after the decision plan is handed by the adjudication authority. Even when the courts have acknowledged the co-extensive obligation of the private guarantor to repay the money owed, the Nationwide Firm Appellate Tribunal in Mr. Nitin Chandrakant Naik v. Sanidhya Industries LLP, refused to incorporate the private properties of the suspended administrators of the company debtor. Equally, it might be attainable that the decision plan contains the belongings of the corporate managed by the private guarantors. In such a situation, by the applying of the reverse piercing, courts can contemplate such belongings inside the plan’s ambition.

Reverse piercing of the veil will permit courts and backbone professionals to look past the company debtor to incorporate a bigger pool of belongings, which can be in any other case evaded as a result of separation of the authorized entities. For instance, Part 18 of the Code is restricted to solely these belongings the place the company debtor has possession rights, whereas the applying of the doctrine will consequence within the belongings owned within the title of the private guarantor being included inside the decision course of.

ISSUES ABOUT THE APPLICATION OF THE DOCTRINE IN INSOLVENCY

In the midst of implementing this doctrine in insolvency instances, numerous considerations come up such because the proportional partition of belongings or the precedence of claims. Whether or not collectors having reverse piercing claims must be granted precedence over all different rank holders as beneath Part 53, or handled on an equal footing with the highest-ranking collectors. Reverse piercing may very well be sought not solely by the insiders but additionally by the outsiders of the company, which permits company homeowners to pierce the company veil at their whim, rendering the Code ambiguous and ineffective.

This may be troublesome when the related company has a number of shareholders, and even when there is just one shareholder, it might present collectors of a shareholder an edge over collectors of the company that they might not in any other case have. Moreover, if the reverse piercing claims succeed, they necessitate the involvement of the adjudicating authority and the applying of the judicial thoughts to make sure that the approval or rejection of the Committee of Collectors’ (hereinafter ‘CoC’) decision plans is just not merely a mechanical course of, however a well-thought-out and reasoned resolution. Consequently, this clause tries to infringe on CoC’s business knowledge, which is the supreme authority for adjudicating the decision plans.

This provision applies solely to ‘people,’ to not ‘individuals’, thereby eradicating company debtors from its scope. Consequently, the reverse piercing may solely be utilized in instances of particular person insolvency.

Earlier than utilizing the reverse piercing of the company veil, it’s argued that the claimant will need to have exhausted all different believable choices, whether or not offered by regulation or extra generally accepted. This may be substantiated by means of the case legal guidelines like William G. Schwab vs. Damenti’s Inc. & Ors. whereby the Pennsylvanian Chapter Court docket has the chance to reverse penetrate the company veil, making one other agency owned by the shareholders accountable for the money owed. Though there existed interchangeability of identities between the shareholders and the businesses of their actions, the courtroom determined that this was insufficient to point that they have been single entities. Consequently, the authorized existence of each companies and their shareholders was preserved. In one other case Floyd vs. Inner Income Service of america, the courtroom discovered that the surface reverse piercing principle of company veil was an aberration, that if used would prejudice harmless collectors of the company who engaged with it primarily based on a separate authorized entity. Consequently, the reverse piercing was denied on this case. Resultantly, this doctrine unfairly hurts the agency’s collectors, who imagine that their loans to the corporate are secured by the corporate’s belongings or in any other case

CONCLUSION

Indian courts have given recognition to each company veil piercing and the precept of alter-ego as widespread regulation rules. It’s the suggestion of the authors that the identical could also be thought-about for reverse company veil piercing, a judicially accepted precept relevant in solely sure distinctive instances. It’s settled in regulation that there exists a robust presumption towards piercing the veil and the courtroom should apply the precept provided that all different avenues of the debt decision are exhausted. In gentle of the problems highlighted, the authors argue that whereas reverse company piercing of the veil have to be judicially acknowledged it should not be implied.


(Rashi and Vijpreet are regulation undergraduates at Nationwide Legislation Institute College Bhopal. The writer(s) could also be contacted by way of mail at [email protected] and/ or [email protected])

Cite as: Rashi Sharma and Vijpreet Pal, ‘The Curious Case of Reverse Company Veil Piercing and the IBC’ (The RMLNLU Legislation Overview Weblog01 July 2022) < https://rmlnlulawreview.com/2022/07/01/reversecorporateveilpiercing-and-ibc/>date of entry