2019 (8) TMI 372 - HC - Companies Law

High Court grants petition under Article 227, directors removed from suit. Directorial liability clarified.

The High Court allowed the petition under Article 227, overturning the Trial Court's decision to dismiss the defendant directors' application to remove ... Lifting of corporate veil - Dishonour of cheque - transactions by the directors in personal capacity or not - The averment of the plaintiff/respondent is that that, with a view to evade payment of their liability to her, the defendants/petitioners are selling their factory located in Himachal Pradesh - Deletion of names from the array of parties in the suit - suit for recovery, wherein four parties were arrayed as defendants - HELD THAT:- The order of the Trial Court is entirely unsustainable. The allegations contained in the plaint do not speak of any transaction with the defendant nos. 2 to 4 in their personal capacity. The business dealings, although claimed to be with the “defendants”, the bills and invoices enclosed with the plaint were all issued on the defendant no. 1 company. Similarly, the cheques mentioned in the plaint were drawn on the account of the defendant no. 1 – company, although they were signed by the defendant no. 2, as a director of the company. The factory which is alleged to be sold in order to evade a decree is also admittedly in the name of the company - The Trial Court has correctly noticed that a company has a distinct legal personality and its directors and shareholders cannot ordinarily be held liable for its dues. However, the cryptic observation of the Trial Court that the circumstances of the present case attract the principle of lifting the corporate veil is not supported by the pleadings before it or the reasoning in the impugned order. The doctrine of the lifting the corporate veil is not available in every case of a liability alleged against a company. To so hold would lead to the consequence that every commercial transaction involving a company will require to be defended by the directors, shareholders or other officers of the company in their personal capacity. This is anathema to the very concept of corporate legal personality. The defendant nos. 2 to 4 are deleted from the array of parties in the suit - petition allowed. Issues:1. Application under Article 227 against order dismissing deletion of defendant names.2. Suit for recovery of outstanding sum against company and directors.3. Allegations of fraud and cheating against directors.4. Application under Order 1 Rule 10 CPC for deletion of directors from parties.5. Interpretation of liability of directors in civil suit.Analysis:1. The petition under Article 227 challenged the Trial Court's order dismissing the application of defendant directors to delete their names from the suit's array of parties. The suit was for the recovery of a sum against a company and its directors, alleging non-payment for supplied material and dishonored cheques.2. The plaintiff alleged that the defendants, including the directors, were liable for payments. The defendants, in turn, sought deletion from the suit, claiming no personal liability as directors of the company. The Trial Court dismissed the application based on fraud and cheating allegations against the directors.3. The Trial Court's reasoning relied on the principle of lifting the corporate veil due to specific averments of fraud against the directors. However, the High Court found the order unsustainable as the allegations in the plaint did not indicate personal transactions with the directors, emphasizing the separate legal entity of the company.4. The High Court highlighted that the doctrine of lifting the corporate veil is not applicable in every case of liability against a company. It explained that this doctrine is limited to specific circumstances, such as fraud or statutory requirements, and cannot be invoked merely based on commercial transactions involving a company.5. Citing legal precedents, including the judgment in Mukesh Hans, the High Court set aside the Trial Court's order and deleted the defendant directors from the array of parties in the suit. It clarified the limited scope of directorial liability in civil suits and distinguished cases concerning criminal liability under the Negotiable Instruments Act.This detailed analysis of the judgment provides insights into the legal principles governing the liability of company directors in civil suits and the application of the doctrine of lifting the corporate veil in specific circumstances.