Mere Family Control Not Enough To Lift Corporate Veil Or Impose Personal Liability On Directors: Madras High Court

The Madras High Court has held that the corporate veil may be lifted where a company's separate legal personality is used as a façade for fraud or to evade an existing legal obligation.

However mere control over a company, allegations of fraud or default in payment cannot, without supporting evidence, make its directors personally liable for the company's debts.

Justice A.D. Maria Clete dismissed a suit filed by Salma Export Import Agency seeking recovery of ₹5.18 crore along with 24% interest, from Eastern Chrome Tanning Corporation Pvt Ltd and its directors, holding that the claim was barred by limitation and personal liability of the directors had not been established.

"The doctrine of lifting the corporate veil is an exception to this principle. Its application is not confined to proceedings concerning oppression and mismanagement. In an appropriate case, the Court may disregard the company's separate personality where the corporate structure is shown to have been used as a façade for fraud or to evade an existing legal obligation. Nevertheless, mere control over the company, an allegation of fraud, or default in payment does not, without supporting material, justify imposing the company's liability upon its directors."

The plaintiff, Salma Export Import Agency had supplied leather and leather products to Eastern Chrome Tanning Corporation during 2013-14, claiming that ₹8.75 crore was outstanding as on March 31, 2014. After five cheques worth ₹4.25 crore, dated January 9, 2015 were dishonoured, the plaintiff initiated proceedings under Section 138 of the Negotiable Instruments Act.

The parties executed a Memorandum of Understanding on November 9, 2015, under which the defendants allegedly acknowledged the liability and agreed to settle the dues. The plaintiff claimed to have received part payments aggregating to ₹2.81 crore between April and July 2016 but alleged that ₹5.18 crore remained outstanding. It filed the present suit on June 10, 2019, seeking recovery of the amount with 24% interest, jointly and severally from the company and its directors.

The Court first held that the suit was barred by limitation. The plaintiff had failed to establish that the alleged payment dated July 1, 2016, was made by the defendants or their duly authorised agent towards the outstanding debt.

The entries in the plaintiff's ledger, without supporting evidence, were insufficient to satisfy Section 19 of the Limitation Act, 1963. Consequently even on the computation most favourable to the plaintiff, the suit filed on June 10, 2019 was beyond the prescribed three year period.

Addressing the plea for lifting the corporate veil, the Court observed that a company's separate legal personality may be disregarded where its corporate structure is used as a façade for fraud or to evade an existing legal obligation. 

The Court further found that the individual defendants had neither purchased the goods in their personal capacities nor furnished any personal guarantee or independent undertaking to discharge the company's dues. 

In view of the findings on limitation and the absence of independent personal liability on the part of the directors, the Court held that the plaintiff was not entitled to recover the suit amount from the company or seek a joint and several decree against the defendants.

All the issues concerning recovery and other reliefs were answered against the plaintiff and the suit was dismissed with costs.

For the Plaintiff: Advocate M. Vidya.

For Defendants 1 and 3 to 8: Advocate K.M. Aasim Shehzad, for M/s. BFS Law Associates.

For Defendant 2: Advocate R. Praveen, for M/s. GMS Law Associates.