Liability of employees who act as Director - Lifting or Piercing corporate veil – Indian Companies Act 1956
Few years back officers of income tax department were conducting raid and searching for the address of a person who is Director of many companies. After long hours of search they reached in a slum and located the house. Within few minutes, the director reached in his house by hearing the news. He came on his bicycle and surprised to see senior officers in his house. More surprise was to the Income tax officers, they could never imagine such a person who is director of many multi Crore companies living in a slum and traveling on bicycle. They did not get anything for raid and the director did not know spelling of the word “Director”.
This is the story of a multi Crore company where peon, sweepers, clerks, officers etc were compelled to become director of the companies, and they obeyed either to save their job or for honour. The common practice was to compel the employees to become Directors, Authorised signatories etc and those who do not agree for that was treated as coward and sacked from the organization.
After the raid many employees become victims and they faced harassment from Income Tax Department, Sales Tax Department, ROC, Electricity Department and many statutory authorities. Some of them received demand notice for Crores of rupees which they cannot pay within their life period. Many employees run away from the town, which caused spoiling their family life, professional life and even their children’s education. Even now many employees are fighting cases in different departments and court.
What the employer did?
After the raid, the employer just disowned the employees/companies and send declarations to different departments that the share holders and directors of the companies are responsible for the liability of the company and the employers are not directors or shareholders of the company. These employers should definitely be treated as criminals who have ultimate cruelty and selfish attitude. Many employees of this organisaton sacrificed their life just for some increment or designation. But some employees who don’t know to write a sentence in English are getting lacs of Rupees salary just because they are fit to act as director and they are still continuing with the same employer.
We call them “Director Directed by others” and they accept it with a smile.
Employees of these companies always believed that the employer will be with them for anything and everything. But they did not apply their common sense. Those who want to do genuine business with ethics will never appoint their peon as director of their company. They themselves will take responsibility for that. The employers who want to do un ethical business and cheat the government and other departments are following this method.
What is the status of such Directors before Law ROC, Income Tax Department, Sales Tax Department and other Government Departments?
In simple words the directors and shareholders are responsible for the liabilities of the company. Due to this, poor employees who act as director are facing harassment from different departments and compelled to fight the case by spending money from their pocket. There are few provisions in the law where the court can lift or pierce corporate veil to identify the real persons who are behind the company.
Lifting or Piercing corporate veil – Indian Companies Act 1956 – Relevant Sections 45, 147, 212 and 542
An incorporated company is clothed with a distinct personality by fiction of law. But a Company is an artificial person and it cannot act its own, it can only act through natural persons. But where the legal entity of a corporate body is misused for fraudulent or dishonest purposes the individuals concerned will not be allowed to take shelter behind the corporate personality.
The principle of “lifting the corporate veil” has found statutory recognition in certain provisions of the Companies Act, 1956 such as Sections 45, 147, 212, 247 and 542 of the Act.
Determination of Real Character of Company
In times of war, it may become necessary to lift the Corporate Veil of the Company to determine whether the company has an enemy character. In such a case the courts may in their discretion examine the character of persons who are in real control of the corporate affairs of the company.
To Prevent Evasion of Taxation
The principle of separate legal personality is being used to evade tax in many cases. In such situation the court can take necessary steps to identify the real persons who are operating behind corporate personality. This provision is helpful for the victims who are compelled to act as directors.
Avoidance of Welfare Legislation
If it found that the sole purpose of the formation of new company was to use it as a device to avoid liability under any welfare legislation, the court may lift the corporate veil to look at the real transaction and purpose behind it.
Prevention of Fraud or Improper Conduct
Where the corporate entity has been used for fraud or improper conduct or to defect or circumvent the law, the courts may pierce the corporate veil to look into the realities of the situation. This provision is helpful for the victims who are compelled to act as directors.
Where a corporate façade is really an agency or trust
Sometimes a company may be deemed to have lost it individuality in favour of its principle and treated merely as an agent or trustee. This may be by creating holding and subsidiary company. In some circumstances the court may treat holding company and its subsidiary as single entity. But there must be evidence that the business of two is combined.
The court have sometimes applied the doctrine of lifting the corporate veil in quasi-criminal cases relating to companies in order to look behind the legal person and punish the real person who have violated the law.
These provisions may give some relief to the employees who are compelled to act as directors just to save their job. But they cannot escape from harassment.
So, before becoming director of a company think twice. You may get another job but you won’t get another life.