Doctrine of Alter Ego

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This article examines the doctrine of Alter Ego and its relationship with the doctrine of lifting or piercing of corporate veil. The article also differentiates the doctrine from vicarious liability.

Introduction

In the world of superheroes, the common people of Gotham City are unaware that the rich Bruce Wayne is the city’s protector, Batman. This is because Bruce Wayne keeps his identity as Batman hidden. This hidden identity can also be called as Bruce’s “alter ego”. Thus, “alter ego” refers to a personality which is very different from that of a person’s true nature or personality. It may come out in certain situations, like for Bruce, he becomes Batman to help citizens in distress or to help the police nab criminals. Believe it or not, the concept of alter ego is also applicable to companies.

Characteristics of a Company

Briefly, the main characteristics of a company are;

1. Legal Person

As per Section 2(20) of the Companies Act, 2013 (“the Act”), a “company” means a company incorporated under the Act or any previous company law. Thus, a company is a creation of law. A company is a legal person and has many of the rights and responsibilities of a natural person. 

In the case of Union Bank of India v. Khader International Construction and Ors. [(2001) 42 CLA 296 SC], the issue was whether a company can sue as an indigent person under Order 33, Rule 1 of the Civil Procedure Code, 1908 (“Order 33”). The appellant contended that ‘person’ in Order 33 referred to only a natural person and not any other juridical persons. 

The respondent, on the other hand, contended that Order 33 was a benevolent piece of legislation intended to help the litigants who were unable to pay court fees. Therefore, the said provision should be construed liberally. It was submitted that when a company, firm, deity, etc could sue in their juristic capacity, there was no reason why they should not be allowed to sue as an indigent person.

The Supreme Court (“the Court”) held that the word ‘person’ must be understood in context and since Order 33 is a benevolent provision, the meaning is to be extended. The Court was of the view that the since the respondent, being a public limited company, was entitled to sue as a legal person, could very well maintain an application under Order 33. 

2. Separate Entity

A company is an entity separate from the group of individuals who incorporate it. 

  • It bears its own name and has its own seal.
  • It is capable of having its own assets and liabilities. It can own property, incur debts, borrow money and have a bank account in its own name.
  • It can enter into contracts.
  • It can employ people.
  • It can sue and be sued in its own name.

In the case of Re. Kondoli Tea Co. Ltd. [(1886) ILR 13 Cal. 43], 8 people transferred a tea garden to the Kondoli Tea Co. Ltd. (“the Company”) for consideration, payable in shares and debentures of the Company, by a document. The question was whether this document which carried out a particular transaction would be a conveyance within the meaning of Section 9(3) of the Indian Stamp Act, 1899. 

It was contended that the 8 people were the only shareholders of the Company. The conveyance was not transfer by sale but mere handing-over by the 8 people in one name to themselves under another name.

The Calcutta High Court held that the Company was a separate person, a separate body. Although the conveying partier were the shareholders of the Company, there was as much sale and transfer of property as it would have been had the shareholders been completely different persons.

3. Not a Citizen

Though a company is a legal person, it is not a citizen under the Citizenship Act, 1955 or the Constitution of India. Section 2(f) of the Citizenship Act, 1955 expressly excludes a company or association or body of individuals from citizenship. However, certain fundamental rights, like the right to equality under Article 14 of the Constitution, are also available to companies.

4. Nationality and Residence

In the case of Gasque v. Commissioners of Inland Review [(1938-1941) 23 TC 210], it was held by the High Court of Justice (King’s Division Bench) that a limited company is capable of having a domicile. Its domicile is the place of its registration and
that domicile clings to it throughout its existence.

Also Read  BALKRISHAN GUPTA v SWADESHI POLYTEX LTD.

5. Perpetual Succession

A company does not “die” in the same sense as a natural person. It comes to an end by the action of winding-up. Since a company is a separate legal entity, it is unaffected by the death of any of its members. The membership may change because of sale/transfer of shares, devolution of shares on legal representatives on death of member or cessation of membership under various provisions of the Act. This will not affect the continuity of a company’s existence.

6. Transferability of Shares

A company’s capital is divided into shares. The shares, as per Section 44 of the Act, are movable property and can be transferred, subject to the provisions of the Act.

Doctrine of Alter Ego

This doctrine was laid down in the case ofLennards Carying Co. Ltd. v. Asiatic Petroleum Co. Ltd. [1915] AC 705. A cargo onboard a ship was lost because of fire on the ship. The respondents had brought an action against the appellants for damages for loss of cargo. The shipowners were a limited company and the managing directors were another limited company. The managing director of the latter company was the registered managing owner. He took active part in the management of the ship on behalf of the shipowners. The respondents alleged that;

  • the registered managing owner knew or had the means of knowing that the boilers were defective;
  • he gave no special no special instructions to the captain or the chief engineer regarding their supervision;
  • he took no steps to prevent the sailing of the ship with her boilers in an unseaworthy condition.

The Court of Appeal had affirmed the decision of the lower court that the shipowners had failed to discharge the duty which lay upon them of proving that the loss happened without their actual fault. The appellants had appealed against this order in the House of Lords (“the House”) in this case.

The appellants denied the allegation of unseaworthiness. They sought the protection of Section 502(1) of the Merchant Shipping Act, 1894 which states that where any goods, merchandise, or other things taken in or put on board of a British-sea going ship are lost or damaged by reason of fire on the ship, the owner shall not be liable for any loss or damage happening without is actual fault.

The House observed that a company does not have a mind or body of its own. It exercises its will through somebody who may be called an agent for some purposes, but who is really the directing mind and will of the company, the very ego and centre of the company’s personality. Such a person may,

  • be under the direction of the shareholders in general meeting, or 
  •  may be the board of directors itself, or 
  • may have the authority co-ordinate with the board of directors given to him under the articles of association, and is appointed by the general meeting of the company, and can only be removed by the general meeting of the company.

The House determined that the nature of the position of the registered managing director fell in the third category. The registered managing director was the natural person to come on behalf of the owners and give full evidence not only about the events but about his own position and as to whether or not he was the life and soul of the company. The “fault”, envisaged in Section 502(1) of the Merchant Shipping Act, 1894, is the fault of somebody who is not merely a servant or agent for whom the company is liable, but somebody for whom the company is liable because his action is the very action of the company itself. 

The House agreed with the findings of the judge at the lower court that the duty of supervision remained with the managing owners, and that the fault of the managing owners was a fault that affected the company itself. Hence, the appeal was dismissed.

The doctrine of alter ego disregards the characteristic of ‘separate legal entity’ of a company. Courts may find that the company lacks a separate identity from its shareholders, resulting in injustice to the company’s debtors. Establishment of the doctrine of alter ego is a cause for courts to lift or pierce the corporate veil and hold the company’s shareholders personally liable for the company’s debts.

Also Read  PRIVATE PLACEMENT OF SHARES

The doctrine of alter ego moves from the shareholders to the company and not vice-versa. This was laid down in the case Sunil Bharti Mittal vs Central Bureau of Investigation [Criminal Appeal No. 35 of 2015 (arising out of Special Leave Petition (Cri.) No. 3161 of 2013 decided on January 9, 2015]. The Supreme Court (“the Court”) observed that “if the person or group of persons who control the affairs of the company commit an offence with a criminal intent, their criminality can be imputed to the company as well as they are “alter ego” of the company”. However, in this case, the company was the accused person. The Court held that the learned Special Magistrate, in its order, had erroneously decided that since the appellants represent the directing mind and will of each company, the acts of the company were attributed to the appellants. This was not the correct proposition of law as it would run contrary to the principle of vicarious liability of the directors of the company. The doctrine of alter ego cannot be applied in the reverse direction.

Doctrine of Lifting or Piercing the Corporate Veil

This doctrine is the consequence of the doctrine of alter ego. The doctrine of alter ego establishes that the company is not an entity separate from its shareholders, so courts look behind the corporate veil and hold the shareholders personally responsible. 

The doctrine of lifting or piercing the corporate veil is usually applied in cases where the company has done some fraudulent or illegal activity, or in defence proceedings such as for tax evasion. The aim is that the company cannot rely on its corporate personality shield to cover its wrongdoings. (Justice Jhunjhunuwala in BSN (UK) Ltd. and Others v. Janardan Mohandas Rajan Pillai [(1996) 86 Com Cases 371 (Bom)])

The Indian judiciary has accepted the existence of the doctrine of alter ego in foreign jurisdictions but has not contemplated it to be distinct from the doctrine of lifting or piercing the corporate veil.

In the case of Iridium India Telecom Ltd. v. Motorola Incorporated and Ors. [(2011) 1 SCC 7], the question was whether a company could be held liable for a criminal offence, namely the offence of cheating under Section 420 read with Section 120B of the Indian Penal Code, 1860, requiring mens rea. The Supreme Court (“the Court”) observed that ‘mens rea’ had been attributed to corporations on the principle of ‘alter ego’ of the company in numerous English cases but did not deliberate on the doctrine of alter ego.

Vicarious Liability versus Alter Ego

The doctrine of alter ego must not be confused with or to have any relation with the concept of vicarious liability of the directors of a company. This is because the concept of agency, i.e., principal-agent relationship, is the foundation of vicarious liability.

Vicarious liability can be seen in statutory provisions relating to offences by companies in may legislations. For example, Section 141(1) of the Negotiable Instruments Act, 1881 (Offences by Companies), holds every person who, at the time the offence was committed, was in charge of and responsible to the company for the conduct of the business of the company guilty of the respective offence, along with the company. In the case of S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla & Anr. [(2005) 8 SCC 89], the Supreme Court held that liability under Section 141 of the Negotiable Instruments Act, 1881 is sought to impose vicarious liability on a person connected with a company, the principal accused being the company itself. However, a clear case of vicarious liability needs to be made out in the complaint. Merely describing the person as a director of the company was not sufficient to satisfy the requirements of Section 141.

Conclusion

The doctrine of alter ego deems a company to be lacking an identity separate from its shareholder. It is amply applied by English courts. However, in India, its is not recognized as a separate principle per se but a part and parcel of the doctrine of lifting or piercing the corporate veil. The doctrine of alter ego is separate from that of the concept of vicarious liability of the directors of a company.

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