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Mukesh Hans v/s Smt.Uma - Case Comment

The case revolves around main issue of lifting of corporate veil ,i.e 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.

Background:
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 defrauded’ the plaintiffs by inducing them to invest and illegally retaining the said amount of the debentures.

Judgement
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 the exception-

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 its members.

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[2]

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:
  1. where the director or directors make themselves personally liable i.e by execution of personal guarantees, indemnities etc.
  2. 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

Analysis:
  1. 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.
  2. 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.

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-
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

Conclusion
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.

End-Notes:
  1. RFA 14/2010 AND CM NO 495/2010, DECIDED ON 16.08.2010
  2. (1933)CH 935 –By Court of Appeal of England And Wales 

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