The paper aims to solve the intricacies and fine tune the concept of Corporate Veil in order to establish a relationship between the illegal concealing of money and piercing the veil. The principle of piercing veil has been incorporated from the common law during the late 1900s, through Adams v. Cape Industries plc where it has been argued that companies use the corporate form to evade the evil deeds performed by them. Through this, the companies also evade the legal liability. The concept of money laundering can be understood as an offence of extracting money through corruption and other means. When such offences are performed by a corporate form in order to evade the legal liability, it encompasses the principle of corporate veil. This paper shall bring on the schemes through which companies use this doctrine as a weapon. It also showcases the challenge faced by the courts for lifting the curtain. The article introduces the recent case laws to prove the hypothesis. It also tries to join the dots through the landmark judgments to limelight the rationale of a company and also proposes possible action to combat such crimes.
Keyword: Corporate veil, money laundering, crimes, legal liability, schemes, illegal conceal
CHAPTER I
1.1 INTRODUCTION
Forming a company is an age old concept that was introduced through the English Companies Act, 1844. This idea has been appreciated and recognized in the year 1850 and was brought in as a Joint Stock Companies Act. The Act underwent twenty five amendments before the enactment of Companies Act, 2013. The word “company” has been obtained from the Latin term “com” which denotes together and “panis” means bread which implies an alliance between two or more people who share their bread (or food) and discusses business. Corporate veil is a theory embedded within the enactment which portrays that a company is an independent legal entity with several features like perpetual succession and common seal. It is an artificial person who is bestowed with the capacity to sue and be sued. But the question which surrounds the entire paper is in what circumstances this veil can be lifted. In a landmark case of Salomon v. Salomon and Co Ltd, Mr. Salomon owned a business of footwear which he later converted into a limited liability company where the company held £ 40,000 share. In total, there were seven subscribers; one of them being Salomon himself, his 4 sons, 1 daughter and 1 wife. After the liquidation of the company, the unsecured creditor’s liability was £ 7,000. The judgement decreed on the relevant issues held by the company is whether the limited liability company was established with the intention of defrauding the creditors and whether the company is an artificial person incorporated under the law. It was also questioned whether a person working under a company’s name is held responsible and accountable for paying off the liabilities. The court held that when a company is established, it is presumed to be a separate legal entity. Thereby, Salomon can’t be held liable in this case because he is a separate debenture holder and would get more priority than the creditors. In this case, he cannot be said to have committed fraud. There are certain classes of shares which entitle the holders to get dividends as per their subscription. A debenture holder gets a higher priority than that of an unsecured creditor. Whereas in the case of Vodafone International Holdings BV v. Union of India, the court held the judgement after piercing through the veil. Vodafone, a telecom company grew its prominence over years in India through the services. During the voda regime, it was of the notion that capital gains didn’t cover under the tax collection scheme when deals are done between two non-resident establishments. The decision of Income Tax Authority was further challenged by the Bombay High Court which deduced to the conclusion that the transaction between the two giant telecom companies involved a substantial controlling interest. It also established a reasonable nexus between the action and the claim where the capital assets have been arisen from India and therefore the deductions shall be applicable in case of non residents companies under Section 195 of the Income Tax Act. Although the Supreme Court ruled in favour of the Telecom giant, the then Chief Justice opined that lifting of the corporate veil is an important task to determine the culprit behind a misdeed. A company is a conglomerate of natural people and the actual work is performed by those natural people. Hence, when a felony has been committed by a person of that particular company, the accused shouldn’t be set free due to the mere excuse of corporate existence. This paper aims to focus on the ingredient of fraud committed by a company which led to the cases of money laundering.
1.2 LITERATURE REVIEW
“A Descriptive Study of Doctrine of Lifting of Corporate Veil” authored by R. Judith Priya, S. Susmitha, Subhicksha and B. Thenmozhi beautifully portrayed the concept of Corporate Veil through the point of view of Indian Legislation. The mention of Salomon v. Salomon is an essential in almost every introduction of this doctrine because this case was the major highlight of the doctrine. The paper is mostly based on descriptive study which uses several case laws to analyze and prove the instances where the doctrine was a failure and highlights the drawback. The lifting of the veil was broadly classified into judicial interpretation and statutory provisions. Although there has been a substantial mention of the doctrine yet the article fails to establish a relationship where the doctrine is misused as a weapon against commission of fraud.
Praveen Kumar strategically pens the concept of Money Laundering through his research paper “Money Laundering in India: Concepts, Effects and Legislation”. It describes intricacies of the concept in Indian Domain while also covering the process and technique. He also took the 2002 Act as an aid to establish his views.
1.3 RESEARCH METHODOLOGY
Research Design
- The following study is made in a descriptive way, so as to provide clarity on the topic being discussed.
- Descriptive method is used not just to answer the cause and effect of a study but to effectuate a significant phenomenon and establish a relation between the two or more variables.
- I have chosen corporate veil and money laundering as the two elements for establishing such a relationship in the descriptive style.
Sources of Data
- The study is done with the help of secondary sources.
- The secondary sources data will be provided from the articles, published papers, books, documentaries from Google Scholar and JSTOR.
1.4 OBJECTIVE OF THE STUDY
The aim of this research is to establish a significant relationship between corporate forms of business using the separate entity as the shield to justify the wrongful purpose. “Mens Rea” is evident in such cases yet the statutory provisions of corporate veil shelter the offender. In order to combat such fraudulent acts, the paper encompasses several dimensions of the doctrine.
CHAPTER II
2.1 MONEY- THE SOURCE OF STUMBLING BLOCK
Money, just a piece of paper yet the entire universe cares about it. It is a medium of consideration, purchase, sale or exchange of goods and/or services. To acquire the services of a doctor or a lawyer, we pay consulting fees; to buy a plot of land, we use the very piece of paper and here we understand its relevance in today’s world. But are we using that mere note to afford the decencies of life?
In recent news it was discovered that doctors, hospitals, IVF centres were predicted to have been involved in Child Trafficking. Well, the answer to the above question gets clarified in the subsequent statement. The Penal Code under Section 370 punishes the offender with an imprisonment of seven years who commits the offence of Human trafficking. Inspite of such provisions being enumerated by the Indian legislation, greed influences people to engage in such heinous crimes. Indeed the contention is true that a coin has two sides and it is effectively proven in this case. Money Laundering, a crime which is performed with utmost sophistication is also influenced by the greed of people.
2.1.1 Meaning of Money Laundering
It can be described as a crime which involves the element “money”. A person is said to be indulged in this crime when he/she involves himself in either of the four activities. They are:
- Concealment- This is when a party is involved in hiding money. Example, Mr. A concealed Rs. 50,000 cash from the company’s locker. Here the element is Rs. 50,000.
- Possession- It means that when a party is involved to have an ownership of the element being described in the provision.
- Acquisition/use- The money although doesn’t belong to a party yet he/she takes control over or to gain that it by his/her own exertion. Example, Mr. X buys a flat and he’s the owner of it. Mr. Y wrongfully resides in the very flat which Mr. X brought. Mr. Y has wrongfully possessed the flat.
(Although the words possession and acquisition sound synonymous yet there is a thin line of difference i.e. Here in this context, acquire means to get or obtain a legal ownership of the element and possess means to have or assert physical control to obtain the element.)
- Project or Claim an untainted property: To identify a particular property to be his/her own in an illegal manner.
This can also be described as a process which is continuous in nature. The person needn’t always be directly associated with it. The party involved in the abetment will be held equally liable for the said offence. The punishment of the offence is enumerated under Section 4 of the Prevention of Money Laundering Act, 2002.
2.1.2 Money Laundering: A form of Tax Evasion
The word Tax Evasion has been originated from the word “evade” which means to avoid in literal sense. But in legal terms, Tax Avoidance differs from Tax Evasion. Tax Evasion simply means a wrongful way of decreasing the liability of tax which one has to pay through concealment or alteration of accounts. But Tax Avoidance simply means planning which is done in order to minimize the tax liability. It is a legal way of decreasing the tax liability. In an American case of United States v. Walter Anderson, the Department of Justice lodged a suit against a local telecom company owner for purposefully evading a hefty amount of $200m in his legitimate income. This case complied all the conditions that were put forth by the Financial Action Task Force for the sophisticated crime of money laundering and therefore it can be concluded that Tax Evasion can indeed be classified under money laundering. FATF Recommendation is an international standard which should be adopted by countries in order to combat problems like money laundering. The launderers attempt to commit such operations in a systematic manner in order to save themselves from the liability as well as the payment of taxes. The steps are as follows-
Step 1: Introduction of Cash
The first step itself determines the crime when the accused party brings in the unauthorised cash within the finance market; it attempts to keep the concealed/possessed/acquired or claimed profit in a bank within the Indian Territory.
Step 2: Split the unauthorised cash
The particular bank often enquires about the whereabouts when a hefty amount is deposited in a territorial bank to make sure that it is a legal transaction. So the schemers spilt the hefty amount into small sums.
Step 3: Choose the medium of utilization of splited cash
It is upon the depositor, in what form shall this splited cash be utilized, whether by depositing in cross border institutions or directly in a domestic bank or by purchasing an asset or through some other way that deems fit.
Step 4: Multiplex Layering of proceeds
In order to fool the Income Tax Authorities, there are several anonymous transactions which are made in order to make it even more complicated to compute.
Step 5: Injecting the unauthorised cash
This is an important step which is performed in all sequences of money laundering where the cash is further introduced in the economy in future to give the status of legitimacy of financial transactions.
The next chapter shall discuss the intricacies of the doctrine.
CHAPTER III
3.1 UNRAVELLING THE DOCTRINE OF CORPORATE VEIL
The word “veil” originated from the Latin word velum which means to conceal or protect. Generally this word was used to describe a piece which was worn by women in order to conceal their faces but in recent decades, this word found its relevance in the corporate world.
A company is a legal establishment which is defined under Section 2(20) of the Companies Act, 2013. A company is classified under several broad categories like on the basis of ownership, on the basis of liabilities and on the basis of controlling power. Different entrepreneurs choose different forms of business as per their suitability. After a form of company has been chosen and incorporated as per the provisions of the Act or any previous companies Act, there is a likelihood of companies incurring liabilities from the transactions. Such liabilities which are further classified into current and non-current liabilities can be in different forms like:
- Liability incurred from the investment on an asset. Example, XYZ Ltd bought machinery for the purpose of business @ 1, 00,000 which has been invested from the capital of the company. Now, the liability that has been incurred by the company is Rs. 1, 00,000.
- Payment of tax is a form of liability of a company. Many companies try to evade tax which results in legal infringement.
- Loan taken by a company for the purpose of collaboration or any pending payment of interest on loan.
- Current liabilities like payment of wages and salaries.
The lists of liabilities are non-exhaustive and the doctrine of corporate veil originates in cases when liabilities arise in such unpredictable contingencies while doing business. The stakeholders, shareholders and employees working under a company can exert themselves without any apprehension of discomfort or stress. This doctrine assures that the burden of liability is reduced to an extent of the limit they have guaranteed for. It ensures the protection of the owners in all circumstances during the commencement of business.
3.1.1 Anomalies of the doctrine
Some owners take due advantage of the doctrine in order to elude from the clutches of law. They incorporate the companies in order to misuse and conduct fraudulent activities to gain financial advantage. The recent amendment of the companies act effectively implemented the provisions in order to punish the wrongdoers through statutory lift. Some provisions that have been enumerated are:
- Civil and Criminal Liability for misstatement of prospectus
When a prospectus is issued by a public company or the promoter who has been interested in the business, it should comply with all the provisions of the Act. The Promoter or the person who is interested in this engagement requires the attestation along with date. It also needs to declare that provisions have been complied thereto. In cases where there is an utter non compliance of the provision of Section 26 of the Act, the criminal liability is invoked under Section 34 and civil liability under Section 35. It also enumerates the punishment for the damage that has been inflicted through such misstatement.
- Acquire money unlawfully
Deposits can be accepted only when it follows the proper procedure enumerated under Section 73 of the act which mandates the company to call a general meeting and pass a resolution for the acceptance of deposit. Prior to this, certain conditions need to be fulfilled like circulation of notice addressing the financial position along with the credit rating of the company. Registrar should be informed about the same within thirty days of the circulation of notice. If there is non-compliance of Section 73 and 76 then it inflicts the punishment under Section 76A.
- Process of Scrutiny
When the Central Government appoints an officer in order to probe into a matter of financial relevance so as to determine the owner of the company, in such cases, Section 216 comes into effect.
- Embezzlement in the process of wind up
When a company is incorporated with the sole purpose of defrauding the people and misappropriation during investment, in such cases, the offender is punished under Section 339 of the Act with the punishment of imprisonment, fine or both. The punishment for Section 339 is enumerated under Section 447.
- Producing incorrect information
The party is required to produce correct information and evidence, if in case the party fails to furnish it, he shall be punished under Section 449 with a penalty of rupees one hundred thousand or less than the amount or imprisonment for a maximum of six months or both.
Through these statutes, courts can order for lifting the corporate veil. The next chapter shall try to establish a thin line of similarity between the two concepts that have been discussed in the previous chapters.
CHAPTER IV
4.1 INTER-RELATION OF THE TWO CONCEPTS
The concept of Money Laundering and Piercing of Corporate Veil goes hand in hand because a person commits an offence of Money Laundering under Section 3 of the Act and tries to escape liability by availing the doctrine of Corporate Veil. In order to punish the perpetrator, the exception of the doctrine is used in such Indian cases.
The famous scandal which involved the Kingfisher Airlines, owned by Vijay Mallyawas a big business tycoon. The company purchased Air Deccan which was founded in 2003 by Mr. Gopinath. But the airline couldn’t sustain the operational cost due to which it incurred severe losses. The Kingfisher Company decided to take over the Air Deccan airlines to increase the profitability but due the lost marketability rate, the tycoon borrowed a lumpsum from several banks to bridge over the airline transporting business. But during the succeeding years, the company suffered an inconsolable loss and defaulted on reimbursing the loans which were approximately Rs. 9000 crores. In order to overcome such defaults, he purposefully evaded taxes by laundering it to foreign incorporations. He recruited dummy directors in order to transfer the borrowed amount. There were several cases of money diversion. This entire scam was planned by using the corporate veil as the shield to protect perpetrator but unfortunately, Serious Fraud Investigation Office which has been established as per the Companies Act, 2013, investigated into the Kingfisher Company’s affair and passed a report intimating the serious fraud which overpowered the financial and corporate arena. Although he was involved in a huge scandal, he escaped the liability by availing bail extradition warrant which was executed by the London’s Metropolitan Police Service. Therefore, we see that although India is bestowed with innumerable laws yet we see that the wrongdoer has beautifully escaped through the prism of Corporate Veil.
Yet in another case of money laundering which involved an amount of Rs. 7,000 crores quite famously known as Satyam Scam although one of the two brothers confessed to the scam and underwent punishment but in this case also, corporate veil was used as a weapon to manipulate the crime in order to deceive the commoners. The founders of the Satyam Computers Ltd. were Rama Raju and B. Ramalinga Raju. They were blood related and started the operation with a very few employees. With time, their business reached cross borders and the net worth of the company increased at a steep rate. Money is the greatest influence in the world and this provokes a person to accomplish something greater than the past achievements. The company started manipulating the accounts to captivate the attention of the investors. This was again another example which proves that Corporate veil is a vicious doctrine which shields the offender.
In Chanda Deepak Kochhar v. ICICI Bank Ltd and Ors., another money laundering case where Ms Chanda Kochhar, the former CEO of ICICI Bank and wife of Mr. Deepak Kochhar, CEO of NuPower Renewables were involved in suspicious activities. The investigating agencies were appointed to investigate the corporate scam where the husband and wife were involved in the loan transfer between the two companies. The reflection of nepotism was remarkably visible where Ms. Chanda had a motive of benefitting with an undue advantage through the Videocon Group. Although the couples were granted bail, the chairman Mr. Dhoot was arrested for inducing them. All of them were held liable under the Money Laundering Act of 2002.
All the above three cases portrayed a wide similarity and included facts through which money laundering took place and we could also figure out that corporate entities used the separate legal entity as a shield to protect themselves from legal dynamics. In some cases we say that lifting of the veil was an effective measure and in some we saw that the perpetrators escaped through the loopholes.
CHAPTER V
5.1 SUGGESTION
Courts face several challenges to pierce the corporate veil in order to bring out the truth. Thereby, the judiciary looks into the four factor method in order to determine whether the case can be within the purview of exception of the principle and money laundering crime. It also suggests the situations in which a red flag should be used to indicate such corporate fraud.
- The first one is fraudulent methods that have been applied to evade the liability; second one is immoral in nature and also lacks fairness, third is the wrongful act and fourth is, it involves the elements which are the necessary ingredients to commit the money laundering activity. These four elements together can be regarded as the four factor method. In such cases, courts can use these ingredients to red flag it and use the exception to the fullest.
- Companies which are unable to prove their legal identity and govern under several affiliations, in such cases the veil should be lifted. For a smooth commencement of financial transaction, a special bar code should be applicable which would help in identifying the legal entity. This code should be uniform in nature.
- If there are insufficient ways of determining the identity of the stakeholders, shareholders and employees of a company then the factor itself shows how dubious the corporation would be when it lacks clarity on such information. This is again a red flag and the veil should be lifted.
- If the company doesn’t comply with the procedure that has been established under the companies Act, 2013 then the lifting process should be initiated by the court. It should comply with the corporate social responsibility and other formalities expressed under law.
- Under-Capitalised companies should not be entertained with corporate shields. Undercapitalization is a situation where a company fails to control a business due to insufficient capital. In such cases there’s a high possibility of fraud and error.
5.2 CONCLUSION
Money Laundering is an immense threat to an economy. It disrupts the financial cycle and shatters the whole system. This process has been inculcated by several business tycoons and the crime mushroomed since 2000s. However, to prevent the threat the legislature introduced “The Prevention of Money Laundering Act, 2002” and was enacted on 17th January 2003. In recent decades, judiciary has contributed immensely to combat such crimes and way forward it is expected that new strategies would be contributed in order to counter the conflicts. The paper identifies the initiating cause to be intention to commit fraud and selfishness. Inspite of addressing these issues, we see cases where billions of money has been involved which manifested the need for laws which are stringent and implemented in a better way.
The agenda of the paper was to establish a substantial relationship between the process of money laundering and the principle of corporate veil. The paper successfully proves that the famous principle of corporate veil is used as a shield by the offenders and in order to combat such crimes like money laundering, the piercing of the shield is an important task.
SOUMILI CHANDRA
PRESIDENCY UNIVERSITY, BANGALORE