Piercing The Veil

The consumer courts hold directors liable for non-payment of dues by companies

It is one of the most famous cases in corporate law. In Saloman vs Saloman & Co 1897 AC 22, the House of Lords declared unequivocally that a company is an independent, distinct and separate legal entity. That legal proposition has been followed around the world.

The members of companies and their directors are thus not liable for dues payable by companies. It appears, however, that this principle is not applicable when it comes to an action against joint stock companies under the Consumer Protection Act.

Instant Growth Funds Pvt.Ltd and I G F Leasing Pvt Ltd had collected deposits from the public. The companies defaulted and were hauled before the Delhi State Consumer Disputes Redressal Commission by depositors. The state commission directed the company and its directors to refund the deposits within three months.

The amount decreed was, however not paid. As a result the state commission ordered that one director Ravikant should be imprisoned for one year and fined his wife, who was also a company director. A writ petition was filed before the Delhi High Court against the order.

The main plea was that the company is a separate legal entity, therefore its directors cannot be liable for its defaults. It was submitted that there are exceptional cases when the corporate veil can be lifted (so that the court can inquire who the people running a company are).

However, they argued that this should only be done in cases where the law creates a penal liability against the company and not in cases of civil liability.

The Delhi High Court by its judgement dated January 27, 1997 turned down this argument and followed the line that