REVERSE PIERCING OF CORPORATE VEIL
Reverse piercing shifts the liability of the shareholders and holds the company liable for their actions. This is used as a way to pay off the debts of the creditors. This doctrine was first established in the United States[1].
Reverse piercing can be distinguished into Inside piercing and Outside Piercing. This depends on which party wishes to lift the veil. Inside piercing is performed when the members or directors of the company receive a benefit or a liability of the company. Inside piercing is for the benefit of the company.
Outside piercing is adopted by third parties or outsiders to satisfy their debts. Here, the third parties pray for relief against the actions of the debtors by holding the company’s assets.
This theory can be seen in the case of W.G. Platts Inc. vs Platts[2], where there was an issue of marital dispute over property. The Court held that the plaintiff could impose liability on her husband’s company to satisfy the debts as mentioned in the divorce decree. The Court gave this judgment since the company was an “alter ego” of the respondent. A company can be called an alter ego of a dominant shareholder. This is because the shareholder controls the management of the company and partly owns the company as well, although not wholly. This was also mentioned in the case of Trossman v. Philipsborn[3].
In another case, GM Leasing Corporate vs The United States[4], it was held that the company was an alter ego of the taxpayer and therefore if he failed to pay taxes, the company would hold that liability. Here, the reverse piercing was applied.
In India, the courts thought that the liability of a shareholder must not be imposed on their company. The Courts did not completely accept the concept of alter ego. In the case of A.K.Khosla v. T.S. Venkatesan[5], the Court held that a company being a juristic person could not have men's rea since it has no mind of its own. Therefore, it cannot be punished for the acts of its shareholders. The view of this court was confirmed in the case of MV Javali v.
Mahajan Borewell Co[6] by the Supreme Court, but with a slight change. Eventually, it was laid down by the Court that a mandatory sentence of imprisonment and fine cannot be imposed on a corporation. In such a case, a fine would be the only punishment. However, the courts were against the concept to hold a corporation liable for the debts or fraudulent acts of the shareholders.
Their stance eventually changed in the case of Standard Chartered Bank v. Directorate of Enforcement[7]. In this case, the Supreme Court applied the principle of reverse piercing by holding the company accountable for the debts and liability of the owners of the company. In the famous case of Iridium vs Motorola[8], the courts acknowledged the concept of alter ego.
Due to the hike in the number of white-collar crime cases, the Courts need to understand this concept of the reverse piercing of a corporate.
The doctrine of the lifting of the corporate veil is an exception that achieves the ends of justice and fairness. Companies were given the benefit of separate legal entities for their protection and growth, but have been often misused the benefit for deceptive practices. In these situations, the courts should adopt to reverse the piercing of the veil for greater good and justice.
In the case of Shamrock Oil & Gas v. Ethridge[9], the Court thought that, “the mere abstraction of the corporate entity should never be allowed to bar out and pervert the real and obvious truth.”
[1] Evan Zhang, Debtor, 463 B.R. 66 (S.D. Ohio)
[2] 73 Wn.2d 434 (1968)
[3] 373 Ill.App.3d 1020
[4] 429 U.S. 338 (1977)
[5] 1991 (2) CHN 321
[6] (1998) 230 ITR 0001
[7] AIR 2005 SC 2622
[8] (2011) 1 SCC 74
[9] 159 F. Supp. 693
This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being.
