The corporate ‘veil’ that protects company shareholders from its liabilities and obligations is being misused to cover up many an activity, mostly nefarious, as is evidenced by a number of scams in the recent past. It is time to lift this ‘mask’ and uncover the truth
"Virtue has a veil, vice a mask," said Victor Hugo. These days, the respectable ‘veil’ is seen, in many cases, competing with the ‘mask’. There is a legal concept of ‘corporate veil’ for companies, which has been in place for a long time. It separates the personality of a company from the personalities of its shareholders, and protects them from being personally liable for the company’s debts and other obligations. Historically, the House of Lords of the U.K. was the first to uphold this concept in the case of Solomon vs Solomon Ltd. and later this was also upheld by the courts in India. As per the Companies Act, the liability of shareholders is limited to the quantum of their shareholding stake in the company. A company in itself is an artificial person created by law and it has its own legal personality. Thus, the principle of corporate veil is already enshrined in the Companies Act.
The distinction between a company and its shareholders, provided by the corporate veil, is seen to be blurring, as we see companies getting caught in fraudulent activities. While a company is a separate legal entity, the fact remains that it can act through human agents which compose it. The façade of a corporate personality has to be demolished at times, to see as to who are the human agents who propel the company through illegal activities. This gives rise to the concept of ‘lifting of the corporate veil’.
The phenomenal rise in the number of shell companies these days and also frauds committed by companies on banks and investors have led to the lifting of the corporate veil by investigating agencies and also by the courts. Aggressive tax avoidance measures have also necessitated tax officers to peep through the corporate veil so as to detect the actual beneficiaries. Some recent economic legislations have incorporated the spirit of lifting of the corporate veil while there are also provisions in the old laws based on this principle.
One very successful recent legislation is Insolvency and Bankruptcy Code (IBC), 2016. It paves the way for the much needed reforms while focusing on creditor driven insolvency resolution of corporates and other entities. The essence of the legislation is to identify the promoters and the connected persons of the defaulter company and make them ineligible to bid to get back the company facing the IBC code proceedings for defaults in servicing its creditors. The promoters will lose the company in quick time stipulated under the IBC. There will be no safety veil, as IBC lifts the basic corporate veil.
The apex court in the case connected with Essar Steel has not only upheld the validity of the law but has been identifying the connected bidder Numetal Ltd. as ineligible, since as one of its shareholders, Rewant Ruia, is the son of Ravi Ruia, who happened to be the promoter of Essar Steel. Comments have also been passed in respect of the other bidder, Arcelor Mittal Ltd. whose ineligibility has been linked with NPA companies Uttam Galva Steel Ltd. and KSS Petron Ltd. to which the bidder company was connected.
In another case under the IBC, the apex court held the Jaiprakash Group liable for fraud. Jaiprakash Associated Ltd. (JAL) was asked to deposit
money in the court for the buyers of JIL. The apex court dismissed the plea of limited liability of JIL.
It is a disturbing phenomenon that the corporate veil is yielding place to the corporate mask to hide things deliberately and wilfully. In the last two years, more than 2.75 lakh companies have been struck off for various reasons. Only 66% of the companies have been seen to be active doing some business. Many are just paper companies, not filing returns and hundreds of them working from just one room.
Why the corporate mask? The reasons are many, depending upon the intention and the scheme of things of the promoters indulging in such nefarious work. Some of these reasons can be to hide the identity of the actual owner or to do money laundering or to finance illegal activities like smuggling and drug trade or even shady tax avoidance planning. The one thing which is obvious is that in all such cases, the intention is never good, and it is done to hide wrongful activities behind the corporate name.
‘The façade of a corporate personality has to be demolished at times, to see as to who are the human agents who propel the company through illegal activities’
To understand the need for a corporate or some such legal mask, let us take the case of the ‘Lady walk’ mansion of Vijay Mallya in the suburbs of London where he lives these days after running away from India. This mansion is in the village of Tewin in Hertfordshire, just over one-hour drive north of London. The mansion was bought from the father of British Formula One champion, Lewis Hamilton by a company with offshore links for more than Rs.100 crores ($15 million).
The official documents list the owner of the mansion as a limited liability partnership called Ladywalk LLP. It has two members, including a company called Continental Administration Services, which is registered in St. Kitts and Nevis, a tax haven country in the Caribbean. A loan to finance the property purchase in July 2015 was made by a private bank in Switzerland. Official papers name the borrower as Ladywalk Investments, a company incorporated in the British Virgin Islands, another tax-haven.
The point to be noted is that Vijay Mallya is in possession of the mansion spread over 30 acres but the documents indicate that the owner is some legal entity supported by the maze of transactions spread over from one tax haven to another and the human agents behind the legal person being in the dark. Creating a legal mask is a specialized job, as the purpose is to hide the de facto owner. The Panama papers indicated that there are highly efficient legal eagles for this purpose, having connections all over the world with some really rich and powerful people as their clients.
In many cases, enthusiastic tax-avoidance planning also becomes the cause of hiding behind the corporate mask. To understand this, let us take the case of the much discussed Mauritius route of investments in India. Black money goes abroad and then it comes in the name of some paper company with an address in Mauritius. By doing so, there used to be no capital gains tax in India, and when the investment was sold, a very small tax was paid in Mauritius and in the whole process the actual owner of the black money remained unknown. This was tax planning by round–tripping. However, now changes have been brought in the DTAA between India and Mauritius to curb this practice.
Recently, there was a news item that the once celebrated banker, Chanda Kochhar and her husband have been booked by the CBI for alleged bribe given by Dhoot of Videocon. The said alleged bribe was given by a chain of events involving companies so as to hide the actual bribe-giving or bribe-taking behind corporate transactions or the corporate mask, to be specific. The chain started in December 2008, when Deepak Kochhar (husband of Chanda Kochhar) and Dhoot were appointed directors of Nu-power Renewables (NRL). In January 2009, Dhoot resigned and allotted nearly 20 lakh securities to Deepak Kochhar. Chanda Kochhar took over as MD and CEO of ICICI bank in May 2009 and Deepak Kochhar’s securities were transferred to Deepak Kochhar’s company, Supreme Energy. Next, loans were disbursed by the bank to Videocon on 26 August 2009 and on 7 September 2009 allegedly by bypassing regulations. On 8 September 2009, a sum of Rs.64 crores was transferred by Dhoot to NRL. Thereafter, more loans were granted by the bank between June 2009 and October 2011. Facts, as appearing in the newspapers, show that bribe was allegedly passed on through corporate transactions so as to appear as commercial dealings between two private persons. The alleged bribe was hidden behind these transactions.
Many bank scams are taking place these days by creating shady companies for the purpose. While Nirav Mody was enjoying the status of an elite jeweller, a scam was taking place as money from Punjab National Bank, Fort, Mumbai was being passed on to fictitious companies opened by Nirav Mody in Hong Kong. The fictitious paper companies were used as tools to cheat the bank and a bank officer was an accomplice in the deal. Today, we have NPAs of about Rs.10 lakh crores and a sizable proportion of that sum is in the name of parties who also do not have any asset, meaning thereby, that such companies have been deliberately used to siphon off bank money.
After seeing the massive rise in the incidents of economic fraud using corporate names, the government is in the process of bringing in appropriate rules. As per media reports, the government is almost ready with rules to lift the corporate veil around multi-layered companies. Shareholders and companies with over 10% stake in a firm will have to disclose the ultimate beneficiaries of the shares, especially overseas owners. It is believed that rules are being framed to provide separate norms for companies with beneficial owners being Indian firms and those with overseas entities. The idea is to find out the ultimate beneficiary and to prevent benami holding.
It is believed that the rules under the making will propose one-step reporting in the case of foreign shareholding, the ultimate beneficiary located in any jurisdiction will have to be disclosed. So, if a Mauritius-based company, whose parent is based in, say the Cayman Islands, has invested in an Indian entity, it will have to go to the ultimate beneficiary, who may be located in the US or the UK. The burden will be on such a company to locate the ultimate beneficiary. In the case of discretionary trusts holding shares, the details of trustees may have to be given.
The moneymaking process has, in many cases, become an unethical game, supported by a web of companies, which require to be pierced.
by S K Jha
