TMI Blog2008 (2) TMI 406X X X X Extracts X X X X X X X X Extracts X X X X ..... , Kanpur to the petitioner no. 2, the present writ petition has been filed by the petitioners seeking a writ of certiorari for quashing the said notice. Further a writ of mandamus has been sought directing the respondents not to realise any amount of trade tax from the petitioners till finalization of winding up proceedings pending before the respondents authorities. 2. The petitioner no.1, M/s Meekin Transmission Ltd. (hereinafter referred to as the Company ) is a company registered under the Indian Companies Act, 1956 (in short the Act ) and engaged in the business of manufacturing of Automotive Gears. Initially it was incorporated as a Private Limited Company on 31.03.1983 and was converted in a Public Limited Company subsequently. In 1991 it became a sick unit and made a reference under Section 15(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as the 1985 Act ) to the Board for Industrial and Financial Reconstruction (hereinafter referred to as BIFR ) which was registered as Case No.109 of 1991. The Industrial Development Bank of India (hereinafter referred to as the IDBI ) was appointed as operating agency for submitting r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the personal assets of the petitioner no. 2. Placing reliance on Division Bench decisions of this Court in Bhikhu Ram Jain, Delhi Vs. State of U.P. and others, 2001 U.P.T.C. 364 and G.C. Mehrotra Vs. Dy. Collector (Collection), Sales Tax, 1997 U.P.T.C. 1217, he contended that the dues of the Company cannot be recovered from the personal assets of the Directors of the Company. He further contended that since the petitioner no. 1 was a sick Company under the provisions of 1985 Act and, therefore, during the pendency of the matter before BIFR recovery cannot be made against him in view of Section 22 of 1985 Act and placed reliance on the decision of the Apex Court in Tata Davy Ltd. Vs. State of Orissa and others, AIR 1998 SC 2928. 4. Per contra, learned Standing Counsel placing reliance on the Division Bench decision of this Court in Naresh Chander Gupta (Supra) and Sri Ram Gupta Vs. The Assistant Collector, 2003 NTN (23) 995 contended that in respect to the tax dues outstanding against a Company, recovery can be made from the personal assets of the Directors of the Company by applying the doctrine of 'piercing the veil' i.e. 'lifting of veil of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the petitioner no.1 that any winding up matter is pending before the High Court. Therefore, on and after 14.03.2003 there was no hurdle before the respondent-authorities from taking coercive steps for recovery of the outstanding tax dues from the petitioner no.1 and, therefore, writ petition, so far as the petitioner no.1 is concerned, has no force and is liable to be dismissed. 7. Now the second aspect needs to be adjudicated in this matter is whether outstanding tax dues of petitioner no.1 can be recovered from the personal assets of the petitioner no. 2 who is Director of the petitioner-Company. 8. This question has to be considered in the light of the status of Company vis-a-vis its share holders, directors and other employees, their inter-relationship and the extent to which one or the other is liable in respect to the matter of the Company. Concept of Companies-History of Incorporation of Companies and relevant statutes: 9. The history of Modern Company Law can be traced back to 14th century (see Gower's Principles of Modern Company Law 4th Edition at page 24) when in England, under the Royal Charters, the Merchant Organisations were allowed to be e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nominal amount of shares held by them but it depended on certain conditions, and, some of those were (1) the company should have atleast 25 members holding at least 3/4 of the nominal capital, each member having paid upto atleast 20% (2) the word 'limited' should be the last component of the company's name; (3) the auditor of the company should be approved by the Board of Trade. 11. The aforesaid Act of 1855 was superseded by the Joint Stock Companies Act, 1856 and is considered to be the beginning of a new era in Company Law by certain recognised authors like Sir Francis Palmer in his 'Company Law', 23rd Edition, page 10. This Act made formation of the company simpler providing that seven signatories to a document called 'Memorandum of Association' can proceed for incorporation of the company. The deed of settlement was done away but it was provided that in addition to the Memorandum of Association it should adopt the model articles attached to the Act and was to be registered in the register of the companies. The first Companies Act came to be enacted in 1862 which has been described by Sir Francis Palmer as the Magnacarta of Cooperative Enterp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndum is required to be submitted at the time of incorporation (Section 13). It shall specifically state that the liability of its members is limited by shares or guarantee, as the case may be. The persons who subscribe the memorandum of the company are members of the company and their names are required to be registered in the register of members (Section 41). 17. The subscribers, therefore, are deemed to be the first members of the company. The word 'shareholder' is synonymous to the term 'member' since there can be no membership except through the medium of shareholding. (see Hawrah Trading Co. Ltd. Vs. C.I.T., AIR 1959 SC 775; Balkrishan Gupta and others Vs. Swadeshi Polytex Ltd. and another, AIR 1985 SC 520). The position of shareholder in a company with limited liability by shares is that when the company earn profits and declare dividends, as per its articles, he is entitled to participate in it and get his share in the dividend. In the event of winding up, he has a further right to participate in the distribution of the companies assets in accordance with the rights given to him under the articles. Beyond this he acquires no interest in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eral meeting or by its Board of Directors or by virtue of its memorandum or articles of association, is entrusted with substantial powers of management which would not otherwise be exercisable by him, and includes a director occupying the position of a managing director, by whatever name called: Provided that the power to do administrative acts of a routine nature when so authorised by the Board such as the power to affix the common seal of the company to any document or to draw and endorse any cheque on the account of the company in any bank or to draw and endorse any negotiable instrument or to sign any certificate of share or to direct registration of transfer of any share, shall not be deemed to be included within substantial powers of management: Provided further that a managing director of a company shall exercise his powers subject to the superintendence, control and direction of its Board of Directors; 21. Besides the Directors and Managing Director, there may be some other persons namely, Manager or Managing Agent, Secretaries etc. who may also be responsible for management of the company, wholly or partially, as the case may be. The terms 'Manager' and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Agent qua company. However, the Managing Director has been held to have a dual capacity inasmuch as being a Director he is an agent of the company but he is also an employee. In Shri Ram Pershad Vs. C.I.T., AIR 1973 SC 637, the Apex Court held: It is again true that a director of a company is not a servant but an agent inasmuch as the company cannot act in its own person but has only to act through directors who qua the company have the relationship of an agent to its principal. A Managing Director may have a dual capacity. He may both be a Director as well as employee....... 24. The work, performance and responsibility of Directors, Managing Directors and other Officers of the company is provided in the various provisions of the Act and it is not necessary for us to go in further details of those provisions for the purpose of present case. 25. From the above discussion the position as culled out is that the word Company imports an association of number of individuals formed for a common purpose. When such an association is incorporated, it becomes a body corporate, a legal entity, separate and distinct from such individuals. Such incorporation must owe its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed two companies, both the companies are distinct and separate entities and it cannot be said that mere identity of shareholders would mean that both the companies are one and the same. A company can contract with its shareholders. Death, bankruptcy or lunacy of any or some of the members would not affect the life of the company in any manner for the reason that company is a distinct person. Today if the company has ten members holding the entire shareholding and tomorrow if they transfer their shares to ten other members, the company would retain the same person though the members would change. Similar is the position with respect to change of Directors. Perpetual succession means the company never dies until it is wound up. The company is not equated with the estate and undertakings owned by it though all are intangible. If the estate of the company is taken over by the government, it would not constitute as taking over of the management of the company. 29. The juristic personality of the company is recognised for approaching the Courts under the Constitution of India also for protection of fundamental rights which are guaranteed to 'persons'. However, they may not s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the articles of the company; (3) A company is distinct from its Board of Directors who cannot enforce a right in their individual capacity which belongs to the company ( TELCO Vs. State of Bihar, AIR 1965 SC 40). (4) The liability of the company simultaneously is also not the liability of shareholders. The shareholders cannot be make liable under a decree against a company has held in Nihal Chand Vs. Kharak Singh Sunder Singh, (1936) 2 Company Cases 418 and Harihar Prasad Vs. Bansi Missir, (1932) 6 Company Cases 32. Doctrine of Piercing of Veil (Lifting the Corporate Veil): Exception to the Law of Separate Entity: 33. The aforesaid doctrine of separate juristic personality of the Company, however, with the passage of time has been subjected to certain exceptions, sometimes on account of specific provisions of the statute, and, sometimes by judicial pronouncements. 34. The most important exception in this regard is that of piercing the veil or lifting the corporate veil to find out who is the real person, beneficiary or in controlling position of the Company. The doctrine of lifting the veil has marked a change in the attitude the law had origi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1993) Ch. 935, C.A. one Horne covenanted not to solicit the customers of M/s Gilford Motor Company. In his attempt to evade this obligation he formed a company which undertook the soliciting. The Court granted injunction against Horne as well as the company formed by him describing the company formed by him a device, a stratagem, and a mere cloak or sham . 41. In Jones Vs. Lipman, (1962) 1 W.L.R. 832 the defendant, to avoid sale of his house to the plaintiff attempted to convey to a company formed by him for the said purpose. Granting specific performance in favour of the plaintiff, Russell, J. describe the said company as creator of the defendant, a device and sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity. 42. In The Workmen Employed in Associated Rubber Industry Ltd., Bhavnagar Vs. The Associated Rubber Industry Ltd., Bhavnagar and another, AIR 1986 SC 1 the Court held where ingenuity is expended to avoid taxing and welfare legislation, it is the duty of the Court to get behind the smoke-screen and discover the true state of affairs. There, a new company was created wholly owned by the principa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an enemy is sought to be defeated, the veil of a corporation is lifted by judicial decisions. 45. In C.I.T., Madras Vs. Meenakshi Mills Ltd., Madurai, AIR 1967 SC 819 the Apex Court justified application of doctrine of lifting the veil of corporate entity for the reason that it found that there was an attempt for tax evasion or to circumvent tax obligation and to disregard the same, the Court pierced the veil and looked to the face who was behind the said veil. It said that in certain exceptional cases the Court is entitled to lift the veil of a corporate entity and to pay regard to the economic realities behind the legal facade. 46. In State of U.P. and others Vs. Renusagar Power Co. and others, 1988 (4) SCC 59 principal company owned the entire share capital of the subsidiary company which was incorporated for generation of electricity and the entire generation was consumed by the principal company. The Apex Court pierced the veil in the present case in view of the fact that Renusagar Power Company was wholly owned subsidiary of Hindalco and completely controlled by the same to the extent of even day to day affairs. The entire generation of electricity of Renus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be legitimate provided it is within the framework of law but colourable devices cannot be part of tax planning. Dubious methods resorting to artifice or subterfuge to avoid payment of taxes on what really is income can today no longer be applauded and legitimised as a splendid work by a wise man but has to be condemned and punished with severest of penalties and for that purpose if a person is found to indulge therein the lifting of veil would also be justified. 49. In Delhi Development Authority Vs. Skipper Construction Company (P) Ltd. and another, AIR 1996 SC 2005=1996(4) SCC 622 the Court found that one Tejwant Singh and members of his family created several corporate bodies for committing illegalities and to defraud people. Discussing the circumstances in which the separate entity of the company must be discarded by lifting the corporate veil, it observed that when the conception of corporate entity is employed to defraud creditors, to evade an existing obligation, to circumvent a statute, to achieve or perpetuate monopoly, or protect knavery or crime, the Courts will draw aside the web of entity, will regard the corporate company as an association of live, up-and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in mind between a Family Company, Private Company and Public Limited Company. However, it refused to apply the said doctrine therein observing that once more than one family or several friends and relatives together form a company and there is no right as such agreed upon for active participation of members were sought to be excluded from management, the principles of dissolution of partnership cannot be liberally invoked and the request to treat the limited company as quasi partnership was not accepted. 53. In recovery of tax dues this Court has also applied doctrine of lifting of veil and permitted recovery of dues from the Directors of the Company in several cases, some of which are Sri Ram Gupta (Supra), M/s Nand Auto Hire Purchase Pvt. Ltd. Vs. Regional Transport Officer/Licensing Authority, Kanpur and others, AIR 2004 ALL. 404, Reflex Industries and another Vs. State of U.P. and others, 2004 (4) AWC 3471, Sanjay Kumar Gupta Vs. District Magistrate, Fatehpur and others, 2002 (3) UPLBEC 2707 and Naresh Chander Gupta (Supra). 54. In M/s Nand Auto Hire Purchase Pvt. Ltd. (Supra) the recovery of road tax was in dispute. The petitioner contended that the truck ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are to be recovered from a corporate body, the Directors etc. would be personally liable. 56. However, learned Standing Counsel sought to draw our attention to para 20 of the judgement which reads as under: 20. The Supreme Court has held in some of the above decisions that in tax matters the veil of corporate personality can be lifted so that the tax dues can be realized. The doctrine of piercing the veil of corporate personality has an expanding horizon. We are therefore expanding this doctrine and declare that ordinarily if there are tax dues against the corporate personality (or societies) they can be realized from the Directors, Secretary of the Society, or others who control the company or the society. This is necessary because in our country what is happening is that tax dues are often evaded by business under the cover of the doctrine of corporate personality. The petitioner society is not a charitable society doing social work but is doing business. Thus the petitioner is not entitled to the protection of the principle laid by the decision in Salomon Vs. Salomon and Co. Ltd. (supra). We find that in para 19 of the judgement on the basis of the factual finding r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke Societies Registration Act but thereafter the Court, with respect, has omitted to notice Section 8 sub-section 3 which permits assessing authority to realise the dues of a dealer from some other persons which does not include a person merely for the reasons that he is Director or shareholder or otherwise office bearer of the corporate body. Besides Section 8 sub-section 3, there is no other provision under the U.P. Trade Tax Act which empowers respondents to recover the dues of a dealer from the assets of any other person. In the present case it is not disputed that petitioner no. 1 who was registered under the provisions of U.P. Trade Tax Act, 1948 was a dealer for the purpose of liability of tax and not the petitioner no. 2. Wherever the legislature has intended, has provided statutory provision empowering tax authorities to recover the dues of a corporate body from its Directors, shareholders or others. For illustration, we may refer to Section 179 of the Income Tax Act, 1961 which reads as under: 179. (1) Notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), where by tax due from a private company in respect of any income of any previous year or from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nored. Section 45 provides where the number of members of a company reduce below seven, in the case of a public company, and the company continues to carry on business for more than six months with such reduced member, every person who knows this fact and is a member of the company is severally liable for the debts of the company contracted during that time. Section 147(4) of the Act provides that if an officer of a company signing bill of exchange, hundi, promissory note, cheque, if not mention the name of the company in the prescribe manner, such officer can be held personally liable to the holder of the bill of exchange, hundi etc. unless it is duly paid by the company. Section 542 of the Act provides that if during the course of winding up of a company it appears that any business of the company has been carried on with intent to defraud the creditors of the company or any other person or for any fraudulent purpose, the persons who were knowingly party to such carrying on business, shall be personally responsible without any limitation of liability for all or any of the debts or other liabilities of the company, as the court may direct. 60. We have not been shown that any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re to be recovered from a company, its Director would be personally responsible even though there is no such provision in the relevant statute. 63. In Sri Ram Gupta (Supra) also the trade tax dues were sought to be recovered from the petitioner, a Director of a Private Limited Company. The Court after recording its inference that the assets of the company have been diverted or syphoned off by the petitioner for his own benefit and is left only a shell, refused to exercise its discretionary remedy. Thus the aforesaid judgment also does not lay down any legal proposition that whenever dues are to be recovered from a company, the Directors would be personally responsible. 64. In Reflex Industries (Supra) one Smt. Poonam Suri purchased an industrial plot from its owner M/s Wazid Sons Exports Ltd., New Delhi vide sale deed dated 23.06.1987. The said premises was in tenancy of M/s Krisons Electronics System Pvt. Ltd. Sri R.K. Suri, Managing Director of M/s Krisons Electronics System Pvt. Ltd. was the husband of Smt. Poonam Suri. On purchase of land by Smt. Poonam Suri, it is said that M/s Krisons Electronics System Pvt. Ltd. company became tenant of Smt. Poonam Suri. A fresh le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e whole transaction was to avoid tax recovery by playing fraud between the petitioner, Smt. Poonam Suri and M/s Krisons Electronics System Pvt. Ltd. Therefore, in the facts of that case, as we have already noticed, the doctrine of piercing the veil could effectively been invoked. The said judgement is thus not an authority to lay down as a general proposition that whenever tax dues are recoverable from a company, its Directors would also be severally and jointly liable to pay the same and proceedings can be initiated against their personal assets. 65. In Sanjay Kumar Gupta (Supra) also this Court in para 8 of the judgement proceeded by observing: In our view, even if that is so it is not fit case for interference under Article 226 of the Constitution. Therefore, in the facts of that case the Court declined to interfere under Article 226 of the Constitution as is also evident from para 19 of the judgment. Learned Standing Counsel sought to press the observations made in para 16 and 17 of the judgment where the Court observed that the doctrine of piercing the veil of corporate personality must be adopted by our Courts in the matter of electricity dues as this has assumed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 1994, decided on 10.05.1994; Bhiku Ram Jain Vs. State of U.P., 2001 U.P.T.C. 364; M/s Shri Mahendra Kumar Jaipuria Vs. Commissioner of Trade Tax, U.P. Lucknow and another, VSTI 2007 All. H.C. 150; Ram Nath Gupta Vs. State of U.P. and others, 1999 U.P.T.C. 1289; Dr. Pawan Jain Vs. Commissioner, Trade Tax, U.P., Lucknow and another, VSTI 2007 All .H.C. 152; Devendra Prakash Goel and another Vs. Commissioner of Trade Tax, U.P., Lucknow and another, VSTI All. H.C. 153 and Smt. Uma Singhania and another Vs. Assistant Collector (Collection), Trade Tax, Kanpur and another, VSTI 2007 All. H.C. 157 [in which one of us (Hon'ble Sushil Harkauli, J.) was a member]. 67. For the sales tax dues of the company the individuals are not responsible but it is the assets of the company which can be proceeded against as held in L. Parameshwari Das Vs. Collector of Bulandshahr, (1955) 25 Company Cases 343 (All) and Desiraju Vankatakrishna Sarma, Re AIR 1955 AP 26. 68. The cardinal principle which has been laid down in the aforesaid cases and expressly stated and reiterated in Purshottam Das Beriwal (Supra) is as under: The cardinal principle o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the nature of an officer of the company and not in the capacity of limited ownership by way of shareholding. Such a Director, in our view, unless is guilty of misfeasance, fraud or acting ultra vires, we are not able to understand as to how he can be made responsible personally for the dues of the company even if we apply the doctrine of piercing the veil. If in such a case the veil is to be lifted, the persons behind the veil, at the best, would be the promoters of the company or those who have sought to obtain corporate personality as a sham or bogus transaction. Similarly, in some of the companies the financial institutions, who advances funds as loan etc., nominate their Director/s to keep some kind of monitoring over the functions of the company so that it may not go on liquidation on account of negligent and careless function of the Board of Directors. Such Directors also, in our view, cannot be included in the category of the persons who would be responsible personally for the dues of the company. 70. In order to find out as to who are the persons responsible personally when the veil is lifted it would be wholly irrelevant as to whether such person is a Director or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the individual shareholder(s) liable for its acts, such a course has been adopted. Broadly, where fraud is intended to be prevented, or trading with enemy is sought to be defeated, the veil of corporation is lifted by judicial decision and the shareholders are held to be persons who actually work for corporation . 74. This judgement also goes to show that normally when the veil is lifted it is the promoters, shareholders or the shareholders who are found to be working behind the veil, responsible, and the Directors as such would not be taking to be responsible for meeting the liabilities of the company unless the statute so provides or it is found that the act of the Directors is ultra vires resulting in extinction of assets and funds of company making recovery from the company impossible. 75. In brief, we can categories the cases in which the corporate personality of the incorporate body can be ignored and it would be better to refer the renowned author Palmer's Company Law 23rd Edition where he has categorised the cases, in which the principle of separate entity of the Company has been discarded by adopting the doctrine of lifting the veil, in 15 categories and som ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It needs a detailed investigation into the facts and affairs of the company to find out as to whether the veil of the corporate personality needs to be lifted in a particular case. After lifting the veil, in a case where it is so required, it is not always that the Directors would automatically be responsible but again it is a matter of investigation as to who is/are the person/s responsible and liable who had occasioned for application of said doctrine. Initial burden for application of the doctrine of Piercing of Veil . 78. Whether in respect to tax dues or other public revenue or in other cases, if one has to discard the corporate personality, then the initial burden would lie upon it to place on record relevant material and facts to justify invocation of doctrine of lifting of veil and to plead that the corporate shell be not made a ground of defence. A personality conferred by the statute cannot be overlooked or ignored lightly and in a routine manner or on a mere asking. In fact whenever the veil is to be pierced, it would mean that somebody, individual or group of individuals, have obtained the shell of corporate personality as a pretext or mask to cover up a transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le unless the doctrine of lifting of veil is found to be applicable in the facts and circumstances of the affairs of that company and thereafter it is further found as to who are the persons who were operating behind the veil. Otherwise, a Director or shareholder cannot be made personally responsible for the dues of a company except of those cases where such a provision is made in the statute or otherwise warranted in law. 80. Neither in the notice nor in the counter affidavit filed in the present case any such case has been made out by the respondents and in a mechanical manner, the impugned notice has been issued to petitioner no. 2 on the analogy that responsibility of the Director personally operates suo motu whenever tax dues of company are not paid. The said assumption on the part of the respondents is thoroughly misconceived and we express our dissatisfaction with the manner in which the respondents have proceeded without understanding legal position in this regard in correct perspective. 81. In the last we propose to consider the submission of learned Standing Counsel made vehemently that this is not a fit case in which this Court may exercise its discretion under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come to rescue to such person, and, against such unconstitutional act of the State. The apparent infringement of constitutional protection cannot be allowed to perpetuate on the mere asking of the State and this Court under Article 226 of the Constitution would be duty bound to interfere and protect a person from such infringement unless it has satisfied that such person is guilty of concealment of material facts or has come to the Court with unclean hands and, therefore, is not entitled for discretionary exercise of power under Article 226 of the Constitution. In the case in hand, neither there is arty pleadings on the part of the respondents nor even a suggestion that the petitioner no. 2 is guilty of either concealment of any material fact or has come this Court with unclean hands or his otherwise is entitled not to have any discretionary jurisdiction to be exercised in his favour. Any other view would encourage the public authorities to indulge in misuse of power and corruption by harassing the much weaker individual. We, therefore, are not inclined to accept the contention of the respondents as above and the same is hereby rejected. 85. In the result, the writ petition su ..... X X X X Extracts X X X X X X X X Extracts X X X X
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