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By Author: Narendra Sharma
Total Articles: 10
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Execution Of Award Against Directors By Lifting Corporate Veil - Sample Application-Cum-Written Arguments

1. That the Decree Holder has filed Execution Petition No. …..and has prayed for the execution of the Award dated …. passed by the Sole Arbitrator in Arbitral Reference No. ……… filed by M/s. ……… against the Judgment Debtors, which has been decided in favour of M/s. …….., the Decree Holder. Shri ….., the Sole Proprietor of M/s. ………, is a senior citizen aged about 83 years, hence merits preferential attention by this Hon’ble Court.

2. That Judgment Debtor No. 1 Company only had filed an O.M.P No. …….. before a Learned Single Judge of this Hon’ble Court under section 34 of the Arbitration and Conciliation Act, 1996 (‘the Act’), impugning the Award dated …... O.M.P. No. ……… has been dismissed by this Hon’ble Court vide order dated ……..

3. That Judgment Debtor No. 1 Company only then filed a first appeal ……. before a Division Bench of this Hon’ble Court under section 37(1)(b) of the Act, impugning the order dated ………. passed by a Learned Single ...
... Judge of this Hon’ble Court. The first appeal has been dismissed by a Division Bench of this Hon’ble Court vide order dated ……... (A copy of order dated ………is annexed hereto marked as Annexure-A)

4. That section 37(3) of the Act provides that no second appeal shall lie from an order passed in appeal under this section, hence, the Award dated ……… has become final and binding on the parties.

5. That section 36 of the Act provides as follows:

“Where the time for making an application to set aside the arbitral award under section 34 has expired, or such application having been made, it has been refused, the award shall be enforced under the Code of Civil Procedure, 1908 (5 of 1908) in the same manner as if it were a decree of the Court”

In this case, all the four Directors of M/S. ……. have also been arrayed as Respondents/Defendants in their individual capacity in the Claim Petition dated …….. submitted before the Learned Arbitrator and the Award dated …….. has been passed against all the Defendants. Therefore, all the Defendants are jointly and severally liable to satisfy the Award, which is applied for being enforced as a decree as per section 36 of the Act. (A copy of Claim Petition dated ……… is annexed hereto marked as Annexure-B and, a copy of Award dated ……… is annexed hereto marked as Annexure-C). The Judgment Debtors No.2, 3, 4 and 5, all residing at ….., New Delhi, have not preferred any application under section 34 of the Act for setting aside the Award. Hence, the Award dated …… has already become final and binding on the individual Judgment Debtors No.2 to 5 at the expiry of three months from the date on which they had received the Award as provided in section 34(3) of the Act.

6. In short, as aforesaid, the Award dated …… has become final and binding on all the Judgment Debtors No.1 to 5, and they are jointly and severally liable to make full payment as per the Award. The Decree Holder is entitled to receive an amount of Rs. …… (Rupees …… only) along with interest at the rate of 12% p.a. from the date of award till the date of realization of the said amount.

7. As per details given in Balance Sheet for 2004-05 of…….., the Judgment Debtor No.1 Company herein, under the heading Schedule ‘M’ Purchases, Purchases of ………. has been given. It is to be noted that a substantial portion of this had been purchased from M/s. ……., the Decree Holder. A copy of Balance Sheet is annexed hereto marked as Annexure-D. Recently, the Decree holder on enquiry has come to know that M/s. ….. has not filed Balance Sheets for 2007-08 onward with the Registrar of Companies, thus it appears that it has committed deliberate non disclosure of documents, in violation of section 220 of the Companies Act, 1956, with a view to facilitate deliberate and forced bankruptcy of the company to avoid payment of this decree.

8. Recently, the Decree holder has come to know that with a malafide intention of deliberate and forced insolvency of the Judgment Debtor No.1 Company to evade present decree by siphoning of funds, the Judgment Debtors No. 2 and 3 have incorporated following companies, started all business transactions in these companies instead of the Judgment Debtor No.1 Company and diverted substantial funds to them in a systematic manner as detailed below.

Date

Proceedings

Dec, 2006

Award passed in favour of the Decree holder

July, 2007

A private company ……. Pvt Ltd has been incorporated by the only members and Directors Ms. …….. and her husband, Mr. …….., Judgment Debtor No. 2 herein (a copy of Certificate of Incorporation is annexed hereto marked as Annexure-E).

Feb, 2008

This Hon’ble Court passed an interim order in O.M.P. No. …… under section 9 of the Act, by which the Judgment Debtor was directed not to alienate the movable and immovable assets mentioned in the petition.

Aug, 2008

This Hon’ble Court, with the consent of the parties, was pleased to make the interim order dated ……… absolute till the disposal of O.M.P. No……….

Sep, 2008

Another private company …… Pvt Ltd has been incorporated by the only members and Directors Ms. …… and her husband, Mr. ………, Judgment Debtor No. 3 herein (a copy of Certificate of Incorporation is annexed hereto marked as Annexure-F).

July, 2010

Yet another private company …….. Pvt Ltd has been incorporated by the only members and Directors Ms. ………. and her husband, Mr. ………., Judgment Debtor No. 3 herein (a copy of Certificate of Incorporation is annexed hereto marked as Annexure-G).

9. As per details given in Balance Sheet for 2011-12 of …… Pvt Ltd under the heading Grouping to Schedule-3, Unsecured Loan of Rs. ………. has allegedly been given by Mr. ……., Judgment Debtor No. 2 herein. Further, under the heading Grouping to Schedule-6, the following group companies/firms has allegedly been accounted for as Sundry Debtors with a view to make them debt ridden for Income-tax evasion, siphoning of funds and diversion of funds.

(a) …….. Agency as Sundry Debtor for Rs. …….

(b)………as Sundry Debtor for Rs……...

(c) ……..Pvt. Ltd, Delhi as Sundry Debtor for Rs…………...

A copy of Balance Sheet is annexed hereto marked as Annexure-H.

10. EFFECT OF INCORPORATION (Company as separate legal person): As per Section 9 of the Companies Act, 2013 (Section 34 of the Companies Act, 1956) one of the characteristics of a company is that it is an incorporated body of persons. It is constituted into a distinct and independent person in law and is endowed with special rights and privileges. Its assets are separate and distinct from those of its members; it can sue and be sued exclusively for its own purpose; its creditors cannot obtain satisfaction from the assets of its members; the liability of the members or shareholders is limited to the capital invested by them; similarly the creditors or the members have no right to the assets of the corporation (vide Salomon V. Salomon & Co. 1897 AC 22). This principle may be referred to as “the veil of incorporation”. The Courts in general consider themselves bound by this principle.

11. LIFTING OR PIERCING THE CORPORATE VEIL: The human ingenuity, however, started using this veil of corporate personality blatantly as a cloak for fraud or improper conduct. Thus, it became necessary for the Courts to break through or lift the corporate veil or crack the shell of corporate personality and look at the persons behind the company who are the real beneficiary of the corporate fiction. And while by fiction of law a corporation is a distinct entity, yet in reality it is an association of persons who are in fact the beneficial owners of all the corporate property [vide Gallaghar vs Germania Brewing Co. (1893) 53 Minn. 214, 254, N.W. 1115]. The various cases in which the corporate veil has been lifted are as follows:

(i) Protection of Revenue.

(ii) Determination of character of a company whether it is enemy.

(iii) Where the company is a sham (hoax).

(iv) Company avoiding legal obligations.

(v) Company acting as agent or trustee of the shareholders.

(vi) Prevention of fraud or improper conduct.

(vii) Avoidance of welfare legislation.

(viii) Protecting public policy.

12. PREVENTION OF FRAUD OR IMPROPER CONDUCT:

(a)The legal personality of a company may be disregarded in the interest of justice where the machinery of incorporation has been used for some fraudulent purpose like defrauding creditors. Prof. Gower observes in this regard that the veil of a corporate body will be lifted where the “corporate personality is being blatantly used as a cloak for fraud or improper conduct”. Thus, in the following case where a company was incorporated as a device to conceal the identity of the perpetrator of the fraud, the Court disregarded the corporate personality.

“In Jones vs Lipman (1962) All E.R. 442, Lipman agreed to sell a certain land to Jones. He subsequently changed his mind and to avoid the specific performance of the contract, he sold it to a company which was formed specially for the purpose. The company had Lipman and a clerk of his solicitors as the only members. Jones brought an action for specific performance against Lipman and the company. The Court looked to the reality of situation, ignored the transfer, and ordered that the company should convey the land to Jones.”

(b) Courts of law are permitted to lift the veil of corporate entity as contemplated in section 34, for the purpose of paying regard to the economic realities behind legal façade, such as, for tax evasion, for circumventing tax obligations or for perpetuating fraud {Juggilal Vs Income-tax Officer, AIR 1969 SC 392; (1969) 2 Comp LJ 188}. The purpose of lifting corporate veil by law in terms of section 34, is to go behind the corporate personality of the individual members or to ignore the separate personality of each company, in favour of the economic entity created by a group of associated companies, {New Horizons Ltd vs Union of India, (1995) 1 SCC 478; 1997 (89) Comp Cas 849}. Doctrine of lifting of corporate veil, as contemplated in section 34, can be made applicable in instant case, in view that the respondent Directors had been attempting to make use of personality of the company in furtherance of their dishonest and fraudulent design {Jai Narayan Parasrapuria vs Pushpa Devi Saraf, (2006) 7 SCC 756; 2006 (65) ALR 163}.

(c) It is submitted that, correspondingly, the legal personality of …… Pvt Ltd, ……….. Pvt Ltd and ……… Pvt Ltd (hereinafter called “three new private companies”, sought to be added as Judgment Debtors No. 6,7 and 8 respectively), should be disregarded in the interest of justice, because the machinery of incorporation has been used for a fraudulent purpose i.e. defrauding the Decree holder. These three new private companies have been incorporated as a device to conceal the identity of the perpetrators of the fraud Mr. ……. and Mr. ………. (Judgment Debtors No. 2 and 3 herein). Therefore, this Hon’ble Court is requested to kindly look to the reality of situation, disregard their corporate personality, declare that …….Pvt Ltd, ……….. Pvt Ltd and …………Pvt Ltd shall be treated as Judgment Debtors No. 6,7 and 8 and, order that they must also make payment to the Decree holder as per the Award.

13. A PROPRIETARY CONCERN IS AN INDIVIDUAL TRADING UNDER A TRADE NAME: Hon’ble Supreme Court in Shankar Finance & Investments Vs State of Andhra Pradesh & Ors.{2008 (8) SCC 536: 2009 AIR (SC) 422; Date of Decision : 26-Jul-2008} has, inter alia, observed (in para 8) thus “As contrasted from a company incorporated under the Companies Act, 1956 which is a legal entity distinct from its shareholders, a proprietary concern is not a legal entity distinct from its proprietor. A proprietary concern is nothing but an individual trading under a trade name.” It follows that M/s. ………, the Decree Holder, in law is its Sole Proprietor Shri ………. himself in his individual capacity. He is running long-sufferingly from pillar to post since last seven years after passing of Award dated …….. in his favour. Shri …….. is a senior citizen aged about 83 years and now completely exhausted hence, merits preferential attention by this Hon’ble Court.

14. DENIAL OF BENEFIT UNDER A PARTICULAR LAW TO A PERSON WILL AMOUNT TO A VIOLATION OF HIS HUMAN RIGHTS: Recently, hon’ble Supreme Court in Remdeo Chauhan @ Rajnath Chauhan Vs Bani Kant Das & Others [JT 2010 (12) SC 516 = 2010(12) SCALE 184; Decided on 19.11.2010] has held, inter alia, as follows

“52. ……..The jurisdiction of NHRC thus stands enlarged by section 12(j) of the 1993 Act, to take necessary action for the protection of human rights. Such action would include inquiring into cases where a party has been denied the protection of any law to which he is entitled, whether by a private party, a public institution, the government or even the Courts of law. We are of the opinion that if a person is entitled to benefit under a particular law, and benefits under that law have been denied to him, it will amount to a violation of his human rights. (emphasis supplied)

62. There is no doubt that the majority judgment of this court in the ADM Jabalpur case {(1976) 2 SCC 521} violated the fundamental rights of a large number of people in this country. Commenting on the majority judgment, Chief Justice Venkatachalliah in the Khanna Memorial Lecture delivered on 25.2.2009, observed that the same be `confined to the dustbin of history.' The learned Chief Justice equated Justice Khanna's dissent with the celebrated dissent of Lord Atkins in Liversidge v. Sir John Anderson reported in (1942) AC 206.

63. In fact the dissent of Justice Khanna became the law of the land when, by virtue of the Forty Fourth Constitutional Amendment, Articles 20 and 21 were excluded from the purview of suspension during emergency.”

15. The following assets of the Judgment Debtors, which have been identified by the Decree Holder and any other asset including Bank accounts of the Judgment Debtors may be attached or taken into custody by the Court Receiver and the same may be put to public auction or sale, and proceeds thereof be remitted to the Decree Holder towards the satisfaction of the decree:

a) Flat No. ……….

b) Godown …….

c) Residential House………

d) Motor Vehicles

e) Plot of land ………..

f) Judgment Debtor No.1 Company maintains an account with ….. Bank being account no. ……….. (this Hon’ble Court may kindly be pleased to call for the details of the said account from the said branch of the …….. Bank directly to know the cash flow and collections of the Judgment Debtor No.1 Company since Dec 2006 and attach the amount deposited therein to satisfy the legitimate outstanding dues of the Decree Holder).

g) …………………………

h)……………………………………….

i)…………………………………………..

j)…………………………………………..

k)……………………………………………

16. That the Distributors / Dealers of the Judgment Debtor No. 1 Company who would in the normal course of business owe monies to the Judgment Debtor No. 1 Company are:

(a) ……….

(b) ……………..

(c) …………….

(d) ……………..

(e) ……………..

(f) ……………..

PRAYERS

It is therefore most respectfully prayed that this Hon’ble Court may graciously be pleased to:

(a) direct the Judgment Debtors to furnish security for Rs……….. (Rupees …….. only) along with interest at the rate of 12% p.a. from the date of award till the date of realization of the said amount being the due and outstanding amount payable by the Judgment Debtors to the Decree Holder ;

(b) inter alia attach the properties of the Judgment Debtors as detailed in paragraph 15 hereinabove to secure the amount of Rs……….. (Rupees ……….. only) along with interest at the rate of 12% p.a. from the date of award till the date of realization of the said amount being the due and payable by the Judgment Debtors to the Decree Holder ;

(c) restrain the Judgment Debtors from alienation, sale, removal or disposition of the property described in para 15 above;

(d) restrain the Judgment Debtors from selling, transferring or assigning ……….. or sub licensing their rights or interests in the said business or royalty payments to third parties or concern and / or in the name of three new private companies including sale and transfer of ……….. till date.

(e) direct the ……. Bank to file a detailed and complete statement of account no. ……being the account of the Judgment Debtor No.1 Company and attach the amount lying deposited therein towards satisfaction of the legitimate outstanding dues of the Decree Holder.

(f) pass ex parte ad interim orders in terms of prayers (a), (b) (c) (d) and (e) hereinabove and confirm the same after notice to the Judgment Debtors ;

(g) pass such other or further orders, including the dealers / distributors described in para 16 above to deposit in this Hon’ble Court the monies payable by the said dealers / distributors to the Judgment Debtors, as this Hon’ble Court may deem fit and necessary in the facts and circumstances of the case or in the interest of justice;

(h) costs.

Author:

Narendra Sharma

Consultant (Arbitration, DRT, Securitisation)

(Mobile-9229574214),

E-mail: nkdewas@yahoo.co.in