The case revolves around main issue of lifting of corporate veil
whether directors of the company M/S Dawson will be personally liable for the
default of investments and we come across following concepts of separate legal
entity and lifting of corporate veil.
The dispute between investors and the directors of the company was regarding the
liability for payment of default of the investment money in the Non convertible
debentures invested by the investors of amount Rs.10,01,142/-which the company
failed to repay.
The factual information regarding the case is that –there was a dispute between
directors of the company named as M/s. Dawson Leasing Limited who are held as
respondents (also the appellants as concerned to appeal) and investors in the
Non convertible debentures.
The company was also made a party in the dispute and
is termed as respondent no 1. The dispute was aroused by the investors by filing
a plaint with averment that the respondents had approached them i.e investors
and induced them to invest a sum of Rs.10,01,142/- in the Non convertible
debentures of the company for a period of 17 months and in lieu to that the
company has issued cheques to the investors totalling of value Rs.9,30,000/-
.when investors went to banks to withdraw the amount, the cheques returned
dishonoured and one cheque among the investor was dishonoured due to account
being seized and also it was alleged that the company issued Non convertible
debentures in the contravention to the companies act,1956 that is it didn’t
create any charge against the debentures which as essential condition for the
issue of non –convertible debentures according to the provisions of the act.
The plaintiff submitted their debenture certificate with the office for pre
redemption which was refused to en cash by the respondents . It was also found
out that the certificates were not duly signed by the authorized signatory. Even
after sending notice to the respondents but there was no payment was made. The
directors and the company were alleged for mala fide intention ‘deceitful
the plaintiffs by inducing them to invest and illegally retaining
the said amount of the debentures.
This case was an appeal to Delhi High Court requesting the court to quash the
order passed by the trial court i.e Additional District Court and grant leave to
defend to the directors.
Trial Court Judgement was as following:
It was held that the M/S Dawson Leasing Company issued cheques against the
provisions of companies act,1956 and was issued with a motive of committing
fraud and cheating the investors . Hence the directors are liable to pay the
default amount along with interest.
But in the appeal to Delhi High Court granted unconditional leave to defend the
suit and passed a decree to set aside the judgement of learned Additional
District Judge directors being liable to pay the default amount.
Important Point To Be Considered Before Analysis-
In the above case the directors induced the investors to invest in the
company’s Non Convertible debentures even though after knowing the condition of
the company and with a mala fide motive to defraud the investors - can this be
considered as an exception to the principle of separate legal entity of a
company ?let understand separate legal entity principle before heading towards
Principle of Separate Legal Entity:
According to This legal principle any
Company incorporated and registered under Companies Act will have a separate
legal entity status that is it has separate existence from its members,
directors etc. It postulates that for the acts of the company the members shall
not be tried .This principles differentiates the liability of the company with
Exception To This Principle –Lifting Of Corporate Veil
There are many exception to this principle one among them is fraud which was
explained in a landmark judgment;
Case: Gilford Motors company Ltd v/s Mr. Horne
So when ever the court feels just and fair by considering the circumstances and
facts of the case and if it is satisfied that there was an act done by the
directors or its shareholders whoever may be according to the case which comes
under the purview of exception then, it can treat the members of the company
liable for the acts done and they are treated as same as business entity and not
treated separately and in such cases there is ‘Lifting of corporate veil
Principle of Lifting of Corporate Veil
It refers to a situation where the members of a company are held liable for
companies debt etc by ignoring the principle of separate legal entity and
limited liability .This is applied by court when the shareholders or members
engage themselves in certain activities like committing fraud,
misrepresentation, or trading with enemy country, or tax evasion, So the answer
to the above question is that there must be lifting of corporate veil as there
is fraud committed by the directors. A company incorporated under the companies
act,2013 ,whether as a private or public limited ,is a jurist person.
There are two exceptions:
- where the director or directors make themselves personally liable i.e by
execution of personal guarantees, indemnities etc.
- Where a director induces a third party to act to his detriment by
advancing a loan or money to the company on the third party proving such
fraudulent misrepresentation, a director may be held personally liable to
the third party for the action of tort that is misrepresentation and of
inducing the third party to act to his detriment and to part with money
Judgement of Additional District Court Was Appropriate As Per The Case.
Did The Court Consider All Issues Or Omitted Any? Does That Effect The
Merit Of The Judgement?
Yes, As Concerned To Delhi High Court Judgment-
Was The Court Decision Appropriate?
According to my perspective ,the judgment of Delhi High Court was not
appropriate because thou there was no contract entered by the directors of
indemnity or guarantees but there was fraud and intentional misrepresentation to
induce them to invest and directors should be made liable personally also there
is one important concept to be discussed but, court ignored the lifting
corporate veil concept just because the plaintiff failed to mention it in
plaint, was not a proper reason for not giving due importance.
- Also, if we consider the case the judge gave too much focus to the
absence of the contract of indemnity instead he must have focused on of one
the exception of principle of separate legal entity that is when an action
of tort along with a mala fide intention to fraud and cheat the public then
action must be taken by considering the landmark cases.
As explained in above paragraph there was more focus on the absence of contract
of indemnity, guarantee, rather than considering the point of fraud and it was
contented by the directors that mere allegation without meticulous explanation
and detail info can’t be entertained as valid averment.
But if we consider the facts of the case it was evident that the issue of
debentures and issue of cheques without proper authority sign and also the
remarks of account being seized and payment stopped by DRAWER was evidential
enough to prove that there was fraud committed.
And yes this omission has lead to reversing the judgment of additional court and
protecting the directors in shield of the principle of separate legal entity was
not proper and hampering the merit of the case
Hence lifting of corporate veil on occasion of fraud committed by the
directors causing detriment to the public must be given larger importance
and more focus and if we look the company is operated and managed by the members
who take decisions on behalf of the company so their activities can’t be
protected under the shield of separate legal entity concept and they should be
made liable accordingly for illegal activities committed by them.
- RFA 14/2010 AND CM NO 495/2010, DECIDED ON 16.08.2010
- (1933)CH 935 –By Court of Appeal of England And Wales