12 Mar 2010

Decree against company cannot be enforced on Director: High Court

Giving a huge relief to the directors of companies, the Delhi High Court in a recent decision has held that a decree against the company cannot be executed against the Directors of the company. The decree holder had sought to argue that since the company was not in a position to meet the liability under the decree and that since one director had offered to pay on its behalf, the claim could be enforced against the other directors of the company as well. The High Court, however, was not impressed. Referring to the celebrated decision in Solomon v. Solomon where the separate entity of a corporate form was entailed, the claim was rejected. 

The High Court inter alia observed as under;
6. The admitted position is that the arbitration award having force of the decree is against the judgment debtor company only and not against its Directors. The question which arises is whether a money decree against a Private Limited Co. can be executed against its Directors. There is no provision therefor in the CPC. Order 21 Rule 50 does provide for execution of a money decree against a firm from the assets of the partners of the said firm mentioned in the said rule but there is no provision with respect to the Directors of a company. The executing court, as this Court is cannot go behind the decree and can execute the same as per its form only. The decree is against the company. This Court as the executing court cannot execute the decree against anyone other than the judgment debtor or against from the assets/properties of anyone other than the judgment debtor. The identity of a Director or a shareholder of a company is distinct from that of the company. That is the very genesis of a company or a corporate identity or a juristic person. The classic exposition of law in this regard is contained in Solomon v. Solomon & Co. Ltd. 1897 AC 22 where the House of Lords had held that in law a company is a person all together different from its shareholders and Directors and the shareholders and Directors of the company are not liable for the debts of the company except to the extent permissible by law. ...

10. It cannot be laid down as a general proposition that whenever the decree is against a company, its Directors/shareholders would also be liable. To hold so would be contrary to the very concept of limited liability and obliterate the distinction between a partnership and a company. Though the courts have watered down the principle in Solomon (supra), to cover the cases of fraud, improper conduct etc, as laid down in Singer India Ltd. Vs. Chander Mohan Chadha (2004) 7 SCC 1 but a case therefor has to be made out. The decree holder in the present case has not made out any case whatsoever. As aforesaid not only were the Directors not parties to the arbitration proceedings but were not impleaded in the execution petition also. There are no averments whatsoever in the execution petition or even in the application under consideration of fraud or improper conduct or of incorporation of the company to evade obligations imposed by law and in which situations the Supreme Court in Singer India Ltd. (Supra) has held that the corporate veil can be disregarded. All that the decree holder has pleaded is that one of the Directors has paid part of the decretal amount. Such voluntary payment by one of the Directors cannot entitle the decree holder to execute the decree against the other Directors also. The only other averments are that the income generated from the company was the income of the Directors. However there are no specific pleadings of fraud and as required to be made under Order 6 Rule 4 of the CPC. It is significant that the three Directors are not stated to be related to each other but are only described as friends of each other. Such faith amongst the Directors is implicit for them to come together to incorporate a company. However, the said circumstance alone is not sufficient to make out a case for lifting of the corporate veil.

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