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1979 Supreme(Ker) 230
High Court of Kerala
M.P. Menon, J.
Official Liquidator - Appellant
Versus
E N Vasudevan & Ors - Respondent
App. No. 187 of 1973
Decided On : 02-03-1979
The main legal point established in the judgment is that a company is a legal entity distinct from its members, and the corporate veil can only be pierced in limited circumstances, such as to prevent fraud or improper conduct, or when questions of control are in issue.
Headnote:
Companies Act - Application under S.460(4) of the Companies Act, 1956 - Salomon v. Salomon and Co. - Ebbw Vale U.D.C. v. S.W.T.A. Licensing Authority - Lee v. Lee's Air Farming Ltd. - Littlewoods Mail Order Stores v. I.R.C. - DHN Food Distributors Ltd. and others v. Borough of Towar Hamlets - Re London Housing Society's Trust Deeds - Re F.G. (Films) Ltd. - Smith, Stone and Knight v. Birmingham Corporation - Re London Housing Society's Trust Deeds
Fact of the Case:
The Official Liquidator filed an application under S.460(4) of the Companies Act, 1956 read with rule (9) of the Companies (Court) Rules, 1959 for direction in relation to a matter arising in the winding up of the Palmland Corporation (P) Limited. The company was ordered to be wound up on 1st June 1973. The Liquidator sought to declare that the trust formed part of the assets of the company and to invest the Liquidator with powers to defend the suits filed in the name of the trust.
Finding of the Court:
The court found that the trust and the company were two separate legal entities, formed under different enactments, and treated separately for tax and accounting purposes. The court dismissed the application, stating that the properties of one legal entity cannot be declared as the properties of another without any transfer in any manner known to law or recognised in equity.
Issues: The main issue was whether the trust formed part of the assets of the company and whether the court should intervene in the suits relating to the trust pending in the subordinate courts.
Ratio Decidendi: The court emphasized the principle that a company is a legal entity distinct from its members, and that it is not an agent or alias for its shareholders. The court referred to various case laws such as Salomon v. Salomon and Co., Ebbw Vale U.D.C. v. S.W.T.A. Licensing Authority, Lee v. Lee's Air Farming Ltd., Littlewoods Mail Order Stores v. I.R.C., DHN Food Distributors Ltd. and others v. Borough of Towar Hamlets, Re London Housing Society's Trust Deeds, Re F.G. (Films) Ltd., and Smith, Stone and Knight v. Birmingham Corporation to highlight the importance of respecting the corporate personality and the limited circumstances in which the corporate veil can be pierced.
Final Decision: The court dismissed the application, stating that the properties of one legal entity cannot be declared as the properties of another without any transfer in any manner known to law or recognised in equity. The court also declined to intervene in the suits relating to the trust pending in the subordinate courts.
M.P. Menon, J.
1. This is an application filed by the Official Liquidator, under S.460(4) of the Companies Act, 1956 read with rule (9) of the Companies (Court) Rules, 1959 for direction in relation to a matter arising in the winding up of the Palmland Corporation (P) Limited.
2. The company was ordered to be wound up on 1st June 1973. Even before that by an order dated 29th January 1973, this Court had appointed the Official Liquidator as the provisional liquidator. In the course of attempting to take possession of its assets, it was found that in some offices of the company, the books of another concern known as the 'Palmland Educational Trust' were being maintained and kept. In some places the offices of the company were functioning in buildings or rooms let out to the trust, and in some places, it was the other way round. The directors of the two were treating the company and the trust as 'sister concerns'; they were even agreeable to the trust being treated as an agent of the company. It appears that there were two other 'sister concerns', one called 'Palmland Coimbatore' and another called 'Palmland Trading Company, Madurai'. On a report and a request for directions by the Liquidator, this Court directed him on 8th February 1973 to take possession of all the assets of the concerns said to be associated with the company, subject to the condition that objections, if any, would be considered and disposed of later.
3. On further enquiries, the Liquidator came to learn that the trust was a society registered under the T. C. Literary, Scientific and Charitable Societies Registration Act (Act XII of 1955), and that practically the same set of persons were in management of the company and the trust. The affairs of the two appeared to be so mixed up and inter connected that prima facie, at any rate, the Liquidator thought that the trust was only a cover for the activities of the company in another form and that in reality the assets of the trust were the assets of the company itself.
4. It was under the above circumstances that Application No. 187/73 initially came to be filed by the Liquidator on twenty-seventh June 1973. The first prayer was to declare that the trust formed part of the assets of the company and to invest the Liquidator with powers to defend the suits filed in the name of the trust. The second was to stay further proceedings in certain suits filed by the trust and then pending in various courts, and also to stay the proceedings in O.P. No. 19/73 of the District Court, Trichur, which was a petition for dissolving the trust. Respondent No. 9 claiming to be a creditor of the company intervened and opposed the application. It appears that at the preliminary hearing, my learned brother, Viswanatha Iyer, J. who heard the matter, was intrigued by the circumstance that a charitable trust was carrying on the same kuri business as the company, with very little charity around and with the same set of persons managing them. Observed the learned Judge:-
"...... it looks as though the two are one concern and the legal form of the two by themselves do not conclude the matter. The realities of the matter have to be looked into. To show that the trust is an agent, there may not be any express agreement for it. It is a matter of inference from facts. The way in which the business of the trust was carried on as disclosed by the accounts and other records may establish the real connection between the two. Number of circumstances may also have to be looked into. The question of lifting the veil by which the trust is clothed is a matter for which there must be proper pleading also."
Suffice it to say that Viswanatha Iyer, J. felt that the matter required further examination. The liquidator was therefore given time to amend the pleadings and implead the trust, by order dated third December 1976.
5. The additional facts disclosed by the amendment are the following: Though housed in the same premises, the company and the trust were having
