NUJS Law Review 12 NUJS L. Rev.

2 (2019)

SOLVING THE BAD LOAN CRISIS IN THE

UNCONVENTIONAL WAY: IS REVERSE PIERCING THE
CORPORATE VEIL A SOLUTION?
*
Naman Kamdar & Akash Srinivasan
India being a country with a large number of closely held companies, the chances of fund diversion,
siphoning, and financial mismanagement are high, since the control of companies largely lies in the
hands of a few individuals. The bad loan crisis, especially, has plagued the Indian economy, with the
willful defaulters causing a wreckage of the Indian banking sector. Several steps have been taken to
address this mounting concern, including the enactment of the Insolvency and Bankruptcy Code 2016,
and amendments to the Banking Regulation Act 1949. However, we believe and propose through this
paper that these efforts need to be effectively supplemented with the application of the doctrine of reverse
piercing the corporate veil. The doctrine involves imposition of liability of the controllers of the
corporation to the corporation itself, thereby leaving little room for the controller to misuse the corporate
façade for wrongful purposes. Application of this doctrine certainly causes disruption in the present set
up of debt recovery, i.e., priority of claims, but it can be tackled with adequate change of the distribution
waterfall, as explained in detail in this paper. Lastly, the elusive aspect of ‘control’ which arises while
determining the application of the doctrine also finds analysis with detailed elucidation. The
recommendations are made keeping in mind the present legal framework surrounding the insolvency
resolution process and keeping in mind the larger public interest involved in recovering the economy
from the persisting crisis.

Table of Contents
I. INTRODUCTION ............................................................................................................... 2
II. CORPORATE VEIL PIERCING AND REVERSE PIERCING: ORIGINS AND
DEVELOPMENT ........................................................................................................................ 3
III. APPLICATION OF REVERSE PIERCING IN INDIA: BORROWING INSPIRATION
FROM OTHER JURISDICTIONS .............................................................................................. 7
IV. SOLVING THE PRIORITY OF CLAIMS MATRIX ....................................................... 11
V. EXAMINATION OF CONTROL ....................................................................................... 13
VI. CONCLUSION.............................................................................................................. 17

*
The article is authored by Naman Kamdar (Advocate) and Akash Srinivasan (Student, National Law University
Odisha). The views of the authors are personal and are not representative of any view taken by any institution or
organisation.

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I. INTRODUCTION

A recent report by the RBI declared the Gross Non-Performing Assets (‘GNPA’)
ratio of Scheduled Commercial Banks (‘SCBs’) at a staggering 10.8%.1 Various methods such as
the Corporate Debt Restructuring (‘CDR’), Strategic Debt Restructuring (‘SDR’), Scheme for
Sustainable Structuring of Stressed Assets (‘S4A’), Joint Lenders’ Forum (‘JLF’), and those
under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities
Interest Act, 2002 (‘SARFAESI Act’) and the Recovery of Debts Due from Banks and Financial
Institutions Act, 1993 (‘RDDBFI Act’) have been adopted to tackle this burgeoning problem.
The landmark Insolvency and Bankruptcy Code 2016 (‘Code’) was enacted to maximise the
value of assets in insolvency proceedings.2 In a recent move,3 an amendment was made to the
powers given to the RBI and it was authorised to proceed against large defaulters in the country
with proceedings under the Code. The main purpose of the ordinance so passed, was to ensure
effective usage of the Code for “resolution of stressed assets and (to) give a big boost to the
government’s efforts to cut down NPAs in the banking sector.”4
These efforts as underlined in the Code to tackle the bad loan crisis in the country
can be complemented with the application of the doctrine of reverse piercing of the corporate
veil. Reverse piercing the corporate veil entails the imposition of the ‘controller’s’ liability onto
the ‘controlled’ corporation.5 Under the traditional method of corporate veil piercing, the Courts
pierce the veil to cut through the legal fiction and hold the person in control of the corporation
liable for illegal actions undertaken at the behest of an artificial legal person.6 On the other hand,
reverse piercing the corporate veil, involves imposition of the individual liability of the controller
of the corporation on the corporation itself.7 The concept of reverse piercing can be divided into
several branches, i.e., inside reverse piercing, outside reverse piercing & triangular reverse
piercing, with each having different usages and implications. Having several advantages and
disadvantages, the principle of reverse piercing draws a tangent to the sacrosanct doctrine of
limited liability.
Although several of the provisions and cases which we explore in this article may
relate more to corporations, we believe that the same would equally apply to wealthy
businessmen and other individuals who misuse the corporate façade of the corporations they
control, whether directly or indirectly. The article will further delineate various circumstances

1
Reserve Bank of India, Financial Stability Report December 2018, December 31, 2018, available at
https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/6CHAPTER2DEC181D8E9C7915894C8291E39D4D4E1EB
A3E.pdf (Last visited on October 10, 2019).
2
The Insolvency and Bankruptcy Code 2016, Preamble, (Maximasation of value of assets).
3
The Banking Regulation (Amendment) Act, 2017.
4
Press Trust of India, President Approves Ordinance giving RBI Greater Power to Tackle Bad Loans, available at
https://thewire.in/banking/president-mukherjee-approves-ordinance-giving-rbi-greater-power-tackle-bad-loans, (Last
visited on October 10, 2019).
5
Kathryn Hespe, Preserving Entity Shielding: How Corporations Should Respond to Reverse Piercing of the
Corporate Veil, 14 J. OF BUS. & SEC. L. 69 (2013).
6
Jennifer Payne, Lifting the Corporate Veil: A Reassessment of the Fraud Exception, 56 THE CAMBRIDGE LAW
JOURNAL 284 (1997).
7
Hespe, supra note 5.

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and conditions under which liability to pay a debt could be evaded as already recognised by and
sought to be protected against under the Code. However, some situations still remain, which we
believe ought to be recognised and perhaps contained by the application of the reverse piercing
doctrine.
The article is divided into six parts. In Part II, we trace the origins of the doctrine
of piercing and reverse piercing the corporate veil, its development and acceptance by courts
across the United States, the United Kingdom, and India. In Part III, we discuss the application
of the doctrine across the three jurisdictions. In Part IV, we deliberate upon the possible solutions
to resolve the conflicts arising in the distribution of assets during reverse piercing claims.
Finally, in Part V, we examine the requirement of ‘control’ for making a claim for reverse
piercing of the corporate veil. Part VI includes some concluding remarks from us.

II. CORPORATE VEIL PIERCING AND REVERSE PIERCING: ORIGINS AND

DEVELOPMENT

As Palmer notes in his celebrated treatise on Company Law, the historic Bubble
Act, 1720 was enacted by the “panic stricken”8 Parliament of United Kingdom to curb the
increasing menace of “speculative and fraudulent”9 schemes used by companies in running their
businesses. This Act swept away all forms of corporations sparing only those which were duly
authorised by the Royal Charter or an Act of Parliament. 10 The advancement of the industrial
revolution caused a rapid increase in the need to raise additional funds and understanding the
predicament of the entrepreneurs the Joint Stock Companies Act, 1844 was passed.11
This was largely to prevent the use of unincorporated company12 form of business
and to encourage a healthy mode of raising capital.13 However, it took yet another decade for the
Parliament to pass the Limited Liability Act, 1855 and sow the seeds of modern corporate law.
There were several enactments between the repeal of the Bubble Act, 1720 and the Joint Stock
Companies Act, 1844 and it was only after numerous experiments that the Parliament took
certain bold and innovative steps in support of growing trade and commerce.14
In 1896, the House of Lords in the landmark case of Salomon v. Salomon & Co.
Ltd15 (‘Salomon’) unanimously upheld the doctrine of corporate personality and the principle of
limited liability. Lord Macnaghten observed that among the major reasons which induce
8
GEOFFREY MORSE, PALMER’S COMPANY LAW, 1007, 1.101 (25th ed., 2010) (Referring to FW Maitland, Collected
Papers (1911), 390).
9
Id.
10
Id.
11
Id.
12
This format of business involved a large association of investors having freely transferable shares. A deed of
settlement executed between the shareholders and the trustee(s) stated the capital structure and had ownership
details. This can be approximated to the present-day concept of Memorandum of Association.
13
MORSE, supra note 8.
14
PAUL L. DAVIES & SARAH WORTHINGTON, GOWER & DAVIES PRINCIPLES OF MODERN COMPANY LAW (9th ed.,
2012).
15
Salomon v. A. Salomon & Co. Ltd., (1897) A.C. 22 (HL) (United Kingdom).

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individuals to form private companies is the desire to avoid the risk of bankruptcy and the
increased opportunities of availing credit facilities.16 He noted that through limited liability, the
persons running the corporation could be shielded from the “harsh provisions of bankruptcy
law.”17
The most interesting part of His Lordship’s judgment, which will become the
central point of the discussion in this article, is where he very strongly stated that he did not see
anything wrongful (or anything contrary to the spirit of Act of 1862) in the idea of one person,
being able to appropriate the entire profits while being a predominant partner and wielding an
overwhelming influence over a corporation.18
While their Lordships vehemently defended the concept of limited liability in
Salomon, there have been numerous subsequent cases19 where the courts were forced to look
behind the corporate façade and hold the ones controlling the entity responsible for the debts and
liabilities of the corporation itself. The decisions in such cases outlined different instances where
piercing the veil was warranted and were soon recognised by the legislatures and adequate
provisions were inserted to permit the lifting of corporate veil.20 India being a colony of England
till mid-1947, its company law jurisprudence has been exactly in line with the English law.21
Indian courts, to this day, continue to apply the English cases as precedents.22
Lord Goff in his opinion on the issue of lifting the corporate veil in Bank of Tokyo
23
v. Karoon stated “but we are concerned not with economics but with law”. Lord Goff
considered the distinction between the ‘controller’ and the ‘controlled’ as “fundamental” and one
that cannot be “abridged”. In comparison, precedents24 from United States in piercing the
corporate veil are clearly suggestive of the fact that courts, in times of need, focus more on
economics and less on law. Though they predominantly continue to respect the entire idea of
corporate façade, they also do not miss any chance to penalise the one who is misusing the
same.25

16
Id., 52.
17
Id., 52.
18
Id., 53.
19
Gilford Motor v. Horne, (1993) Ch 935 (United Kingdom); See also Jones v. Lipman, (1962) 1 WLR 832 (United
Kingdom); Adams v. Cape Industries Plc, (1990) Ch 433 (United Kingdom); DHN Food Distributors v. Tower
Hamlets London Borough Council, (1976) 1 WLR 852 (United Kingdom).
20
The Companies Act, 2013, §§ 34, 35, 447; See also Companies Act, 2006 (U.K.) §§ 399, 409; Insolvency Act,
1986, (U.K.) § 213-216.
21
Justice K. G. Balakrishnan, The Role of Foreign Precedents in a Country’s Legal System, 22(1) NATIONAL LAW
SCHOOL OF INDIA REVIEW (2010).
22
Id.
23
Bank of Tokyo v. Karoon, (1987) AC 45 (United Kingdom) 64; See also Tokios Tokeles v. Ukraine, Decision on
Jurisdiction and Dissent ICSID Case No. ARB/02/18, (Apr. 29, 2004) 20 ICSID Rev-FILJ 205, IIC 258 (2004) (The
C hairman of the Tribunal, Prosper Weil, asserted that economics should prevail over formal legal structures).
24
In re DiLoreto, 266 Fed. App’x. 140 (3d Cir.: 2008); See also In re Schuster, 132 B.R. 604 (Bankr. D. Minn.:
1991).
25
CF Trust Inc v. First Flight Ltd, 266 Va. 3 (Va. 2003).

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This distinction or limitation of common law systems was noted in the recent
judgment of Prest v. Petrodel26 by Lord Sumption in his masterly drafted opinion. His Lordship
observed:

“Most advanced legal systems recognize corporate legal personality while

acknowledging some limits to its logical implications. In civil law jurisdictions,
the juridical basis of the exceptions is generally the concept of abuse of right, to
which the International Court of Justice was referring in Case concerning
Barcelona Traction, Light and Power Co. Ltd (Belgium v. Spain) (Second Phase)
[1970] ICJ Rep 3 when it derived from municipal law a limited principle
permitting the piercing of the corporate veil in cases of misuse, fraud,
malfeasance or evasion of legal obligations.”
As noted further, it “illustrates the breadth” of the application of the doctrine.
Reverse piercing the corporate veil is one such principle which distinguishes the
attitude towards corporate facade across various jurisdictions.27 While traditional approach to
piercing the corporate veil involves imposing the liability of the corporation upon the individual
or entity controlling it for misusing the corporate façade in various different ways,28 reverse
piercing the corporate veil involves imposing the liability of an individual or parent corporation
upon the corporation controlled or its subsidiary, as the case may be, respectively. 29 As is
succinctly put by the United States Bankruptcy Court,30 it is a principle used by the creditors or
someone in their behalf to raise claims over the assets of the entity which the defaulting debtor
owns or holds interest therein.
It is true that reverse piercing has an adverse impact on the innocent shareholders
of the corporation, as a corporation would consist of other non-culpable shareholders, who would
be prejudiced if the corporation’s assets could be attached directly, and thus, this doctrine
warrants limited application.31 We can also see this in the case of Scholes v. Lehmann,32 where
the court considered it rather wrong to seize the corporation’s assets where there existed more
than one shareholder. However, despite this impact, we believe that it is not something which
can be thrown aside as being too radical an approach, cutting across the very framework of
corporate law. As noted by the Hon’ble High Court of Singapore in Koh Kim Teck v. Credit
Suisse Ag,33 the issue of reverse piercing demanded certain serious deliberation and was not
worth dismissing altogether.

26
Prest v. Petrodel, (2013) UKSC 34 (United Kingdom).
27
Id.; See also Dillingham v. Dillingham, 434 S.W. 2d 459 (Texas Civ-App.: 1968); McCall Stock Farms, Inc. v.
United States, 14 F.3d 1562, 1568-69 (Fed.Cir.1993).
28
ROBERT R. PENNINGTON, PENNINGTON’S COMPANY LAW (8th ed., 2006).
29
Nicholas B Allen, Reverse Piercing of the Corporate Veil: A Straightforward Path to Justice, 85 ST. JOHN’S L.
REV. 1147 (2011); See also Kurtis A Kemper, Acceptance and Application of Reverse Veil Piercing, 2 A.L.R. 195
(2005).
30
In re Evan Zhang, Debtor, 463 B.R. 66 (S.D. Ohio).
31
Cascade Energy and Metals Corp. v. Jeffery G. Banks, 896 F.2d 1557 (1990) at 1577.
32
Scholes v. Lehmann, 56 F.3d 750 (7th Cir.: 1995).
33
Koh Kim Teck v. Credit Suisse Ag, (2015) SGHC 52 (Singapore).

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Arguably, the judicial aversion towards the doctrine is more because of the
adherence to the archaic principle of separation of legal entity34 which we believe must be
reviewed through modern lens. The theory of artificial legal person has failed to keep up with the
fast modernising corporate world.35 Going back to Lord Goff’s observation, it is the denial to
examine the economic realities which impede the courts from applying the doctrine of reverse
piercing.
Most common forms of reverse piercing include insider reverse piercing,36
outsider reverse piercing37 and triangular reverse piercing.38 The first form involves the claim of
disregarding the corporate structure by the corporation owners themselves to either impart a
benefit or satisfy liability of the corporation or vice versa. A classic example of the same would
be the case of Macaura v. Northern Assurance Co,39 wherein the owner claimed application of
insider reverse piercing to impart the benefit of a fire insurance policy, held in his own name,
onto his company for loss caused due to fire. In this case, denying the claim, Lord Wrenbury
noted that even if the corporator owned all of the company’s shares, it did not make him the
corporation.40 This form of reverse piercing is largely for the benefit of the corporation or the
owner. The Delhi High Court in the case of Prem Lata Bhatia v. Union of India,41 accepted the
argument of the petitioner and treated the corporation and the owner as one and same to prevent
injustice caused to the licensee due to actions of the respondent.
Outsider reverse piercing involves claims against the assets of the corporation by
the ‘personal creditors’ of the ‘owners’ of the corporation.42 This form of reverse piercing is
applied when third party individuals or corporations seek access to corporate assets as redress to
wrongs of the controller.43 For instance, in Shamrock Oil & Gas v. Ethridge,44 the District Court
of Colorado had permitted a claim for outside reverse piercing where a third-party creditor held a

34
Michael J. Gaertner, Reverse Piercing the Corporate Veil: Should Corporation Owners Have It Both Ways?, 30
WILLIAM & MARRY L. REV. 667 (1989).
35
The idea of separation of ownership has been used time and again to form shell corporations for perpetration of
several frauds, money laundering activities, white collar crimes and tax evasion activities through increasingly
complex structures of holding. While there are laws to actively prohibit and penalise such actions, the authors
believe that certain modifications need to be created to ensure that it keeps up with the modern times, to complement
such existing laws.
36
Id.
37
Kathryn Hespe, Preserving Entity Shielding: How Corporations Should Respond to Reverse Piercing of the
Corporate Veil, 14 J. OF BUS. & SEC. L. 69 (2013).
38
Gary J Mennitt, Reverse and Triangular Piercing of the Corporate Veil, 223 N.Y.L.J. 53 (2000).
39
Macaura v. Northern Assurance Co. Ltd., (1925) AC 619 (HL) (United Kingdom).
40
Id., 633.
41
Prem Lata Bhatia v. Union of India, (2006) 128 DLT 24 (India) (A license was granted to the owner of the
corporation by the Government of India and the said license terms prohibited the same to be used by any other
person for any purpose. The licensee commenced business under the name and banner of Romika World Travel Pvt.
Ltd (wherein the licensee and her husband owned 97.93% shares) at the same premises for which the government
had granted license. Considering the company and licensee to be distinct, the government brought an action seeking
to revoke the license. The court however lifted the corporate veil to prevent injustice, while considering it a common
practice for individuals to pursue business activities in a like manner).
42
CF Trust Inc v. First Flight Ltd, 266 Va. 3 (Va. 2003).
43
Controller here could mean either an individual shareholder or a parent corporation.
44
Shamrock Oil & Gas v. Ethridge, 159 F. Supp. 693 (D. Colo. 1958).

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decree against the owner of the defendant company in his individual capacity. The plaintiff had
proceeded to attach an oil drilling rig, which was the company’s main asset to satisfy the decree.
The court’s reason for allowing this claim was based on the fact that the company was merely an
alter ego of the individual defendant, who had transferred his assets to the corporation and was
habitually engaged in comingling his funds with that of the company. Similarly, in Curci
Investments v. James Baldwin,45 the California Court of Appeal held that a judgement creditor
was not precluded from outside reverse piercing to make liable a Delaware Limited Liability
Company (‘LLC’) as a judgement debtor on a judgement against a shareholder of the LLC.
Lastly, under triangular piercing, the liability of one entity is imposed on an
affiliate entity via its controller.46 The liability moves up to the dominant individual or the
controller corporation and then is flowed back down onto the second affiliate. 47 The District
Court of Arkansas48 described a triangular piercing claim as one which “results from a sequential
application of the traditional piercing doctrine and the ‘reverse piercing’ doctrine,
which…permits two related, though independent, corporate entities…corporations which hold
no ownership interest in each other, to be held liable for the malfeasance of the other.” Thus, the
main difference between the applications of the various forms is the type and nature of claimant
entity.

III. APPLICATION OF REVERSE PIERCING IN INDIA: BORROWING

INSPIRATION FROM OTHER JURISDICTIONS

As is noted by some scholars,49 the doctrine of reverse piercing has been unknown
in English jurisprudence. There is also lack of uniformity in its application across state
jurisdictions in the United States.50 Yet the nature of remedy it offers has compelled almost all
courts in the US to at least deliberate upon its applicability in appropriate situations.
The earliest application of the principle can be traced back to June, 1865, by the
Court of Appeals, New York, where a perfect outsider reverse piercing claim was brought in the
case of Alfred Booth v. Jeremiah Bunce.51 In this case, the controllers of an ‘embarrassed’52
corporation formed a new corporation and transferred all the property from the former to the
latter to begin business again. A conflict of priority of claims between the creditors of the two
corporations was solved by the court considering the law concerning fraudulent conveyance,53

45
Curci Investments v. James Baldwin, 14 Cal.App.5th 214 (2017).
46
Mennitt, supra note 38.
47
Id.
48
Nursing Home Consultants v. Quantum Health Services, 926 F. Supp. 835 (E.D. Ark. 1996).
49
Jeff HY Chan, Should Reverse Piercing of the Corporate Veil be introduced into English Law?, 35(6) COMP.
LAW. 163 (2014).
50
Jurisdictions like Georgia and California do not accept the doctrine; See Acree v. McMahan, 585 S.E. 2d 873 (Ga.
2003); Postal Interest Press v. Kasawa Corp., 162 Cal.App.4th. 1510 (Cal. Ct. App. 2008).
51
Alfred Booth v. Jeremiah Bunce, 33 N.Y. 139 (N.Y. 1865).
52
Equivalent to insolvent.
53
The transfer of assets from one corporation to another was considered to be fraudulent, and with the intent to
hinder, delay and defraud the creditors of the former corporation.

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and the doctrine of reverse piercing. The court observed that though the new corporation was a
valid legal entity for its own creditors, the principle of qui prior est tempore, potiore est jure54
would enable the old creditors to make their claims against the new corporation, owing to the
fact that the controllers of the corporation were same and that the transfers were fraudulent.
Here, a distinction needs to be drawn between several situations. First, where the
property in question belonging to the debtor is transferred immediately/sometime before the
claims arose; second, the transfer takes place after the claims arose; third, the property is
transferred despite a court order against the property; fourth, the property is never transferred but
the transactions are so structured that debtors in all cases would be shielded from liability; and
fifth, absence of perpetration of fraud or crime.
Over the course of time, the courts in the United States have given judgments
which make it clear that the remedies of fraudulent conveyance laws and reverse piercing are
mutually exclusive.55 Reverse piercing, in any way, being an equitable doctrine would be
applicable when the law is insufficient to deal with the situation but equity and justice warrant
so.56
In India, thus, §52,57 §5358 and §53A59 of Transfer of Property Act, 1882, and
§4960 of the Insolvency and Bankruptcy Code, 2016, would act as the perfect remedy for the first
three situations as outlined hereinabove. Further, §32961 and §33462 of the Companies Act, 2013,
as amended by the Insolvency and Bankruptcy Code, 2016, also render transfers carried out
within a period of one year (or two years, in case of a related party) (‘relevant period’) before the
presentment of a winding up petition under the Code or while the winding up proceedings are
pending, as void.63 Further, §4564 of the Insolvency and Bankruptcy Code, 2016, helps avoid
undervalued transfers being made during the relevant period.65 §47 of the Code66 further
empower the creditors of the corporate debtor to claim avoidance of such undervalued transfers.
For the fourth or fifth situations, as given hereinabove, we believe that the
concept of reverse piercing would be an appropriate remedy. For this, various factors 67 can be

54
Meaning, he who is earlier in time is stronger in law.
55
Commissioner of Environmental Protection v. State Five Industrial Park Inc, 304 Conn. 128 (Conn. 2012),
(“…corporate veil piercing is an equitable remedy, it should be granted only in the absence of adequate remedies at
law…challenging his or her transfer of assets to the corporation as fraudulent conveyance or illegal conversion…
these remedies may obviate the need for the more drastic remedy of corporate disregard…”).
56
Id.
57
The Transfer of Property Act 1882, §52.
58
The Transfer of Property Act 1882, §53.
59
The Transfer of Property Act 1882, §53A.
60
The Insolvency and Bankruptcy Code 2016, §§49, 69 , 66.
61
The Companies Act, 2013, §329.
62
The Companies Act, 2013, §334.
63
The Insolvency and Bankruptcy Code 2016, §43(4).
64
The Insolvency and Bankruptcy Code 2016, §45.
65
The Insolvency and Bankruptcy Code 2016, §46.
66
The Insolvency and Bankruptcy Code 2016, §47.
67
These factors have been collated from a number of cases. See In re Mass, 178 B.R. 626 (Bankr. N.D. Pa 1994); In
re Schuster, 132 B.R. 604 (Bankr. D. Minn.: 1991).

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looked into to determine the application of the principle,68 though not as a strait-jacket formula,
but as a guide for looking into similar situations. First, where there is a total failure to observe
any corporate formalities by the debtor; second, where there are no directors’ or shareholders’
meetings and no dividends are paid; third, the absence of corporate records; fourth, where at all
times the proceeds of business are used as if they are the assets of individual debtor themselves;
fifth, where there is continuous intermingling of funds between the debtor and the corporation;
sixth, where the property owned by the corporation is always used by the debtor for their
personal benefit and enjoyment or vice versa; and seventh, where the debtor is a dominant
shareholder in the corporation and has the power to take/influence decisions. In other words, the
control test should be made applicable.
However, it is pertinent to note that control and ownership are not sine qua non
inter se for the application of reverse piercing. At times it may so happen that despite absence of
any real shareholding the individual handles the corporation from behind the scene. Courts term
this as equitable ownership.69 This concept has been recently incorporated in the Companies Act,
2013 in India by the Companies (Amendment) Act, 2018 in §90 and is known as the concept of
“significant beneficial owners”, which has been discussed later in this article. Thus, the above
factors make the court look into the economic realities rather than the “form”. That said, we
submit that a court should be careful not to find fraud or malpractice unless it is distinctly
pleaded and the onus is on to the claiming parties to prove the presence of the elements outlined
above. It is also to be noted that a court is careful not to find fraud or malpractice unless it is
distinctly pleaded and the onus is on to the claiming parties to prove the presence of the elements
outlined above.70
In CF Trust Inc v. First Flight Ltd,71 it was noted that the US courts in previous
cases have denied a claim for reverse piercing, not because they rejected the concept per se but
due to sheer absence of sufficient facts for sustenance of such claim. In the case of In Re
DiLoreto,72 the court went on to reverse pierce the veils of various corporations and offshore
entities for the assets to be included in the bankruptcy estate. It was noted that the defaulter had
over several years put into place a complex web of entities and assets owned (on paper) by
various family members and other entities, which however, remained under his complete

68
Several scholars opine that application of the test for traditional corporate veil piercing to reverse piercing as well
would be the best way to determine application of the doctrine. See Gregor Crespi, The Reverse Piercing Doctrine:
Applying Appropriate Standards, 16 J. CORP. L. 33 (1990-91); See also CF Trust Inc v. First Flight Ltd, 266 Va. 3
(Va. 2003) (“…The rationale for traditional piercing operates with equal force in support of reverse piercing…”).
69
See In re Easton, 647 N.Y.S.2d 909 (N.Y. 1995), (held that an equitable owner could satisfy the domination
requirement and legal ownership was not a compulsory pre-requisite). But, there is a spilt with respect to this
position amongst different jurisdictions in the United States. For example, California and Illinois require ownership
as a precondition for veil piercing. See, Trossman v. Philipsborn, 373 Ill.App.3d 1020 (Ill.App.Ct. 2007).
70
Generally, the burden of proof is on the party claiming a particular default to exist. The court, though having all
encompassing powers, is under no obligation to dig deep into a particular transaction over and above the default
claim made by the claimant. For instance, a parallel can be drawn from the amendment of charge related provisions
under the Criminal Procedure Code, 1972. While, the court has wide powers to amend the charge framed before the
pronouncement of the judgment, it is under no obligation to do so. Moreover, while framing the charges, the court
ought to confine itself to the documents presented before it under Section 173 of the Code of 1972.
71
CF Trust Inc v. First Flight Ltd, 266 Va. 3 (Va. 2003).
72
In re DiLoreto, 266 Fed. App’x. 140 (3d Cir.: 2008).

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control.73 Thus, it becomes clear that if the facts have warranted so, the courts in the United
States have not refrained from application of the doctrine.
Further, in case of In Re Schuster,74 the court went on to note that the defendant
was not required to assert the perpetration of fraud or crime by the corporation. The urgency to
ensure justice by looking at the bigger picture of entire business structure in the country, the
courts could take liberal moves ahead. The predominant premise in the process of reaching such
a decision is to look at the requirement being fulfilled by disregarding the corporate form, viz.
principles of equity, public policy or any specific statutory mandate.75
In India, conflicting opinions have been given by various courts and tribunals
with respect to the application of the doctrine. While there exist rare examples of its application,
some have even refrained from discussing it, as can be seen in the Securities Appellate
Tribunal’s order in NEPC India Ltd v. SEBI,76 where it only noted the arguments as presented by
the counsel on behalf of appellants, who with an extremely unwelcome attitude towards the idea
of reverse piercing, argued that the principle of reverse piercing of corporate veil as averred by
the respondent was unheard of and it was never a practice to lift the corporate veil to find out
anyone existing behind an individual.
Two recent examples of claims for application of reverse piercing can be noted
from the cases of State Bank of India v. Kingfisher Airlines77 (‘Kingfisher Airlines’) and Punjab
and Sind Bank v. Skippers Builders Pvt. Ltd.78 (‘Skipper Builders’). Kingfisher Airlines79 was an
interesting case of debt recovery against Mr. Vijay Mallya by a consortium of banks, where the
counsels for IDBI Bank reportedly argued that Mallya’s liability to Kingfisher ought to be fixed
using the doctrine of reverse piercing considering the fact of being the chief promoter and having
controlling interest he holds in all the companies.80

73
Id.
74
In re Schuster, 132 B.R. 604 (Bankr. D. Minn.: 1991).
75
Id.
76
Securities Appellate Tribunal, (Mumbai), NEPC India Ltd v. SEBI, (March 31, 2013).
77
Debt Recovery Tribunal, (Karnataka, Bnagalore), State Bank of India v. Kingfisher Airlines Ltd., (January 19,
2017).
78
Debt Recovery Appellate Tribunal, (Delhi), Punjab and Sind Bank v. Skippers Builders Pvt. Ltd., II BC 124
(2016) .
79
Debt Recovery Tribunal, (Karnataka, Bnagalore), State Bank of India v. Kingfisher Airlines Ltd., (January 19,
2017). (Defendant 1 is Kingfisher Airlines Ltd, Defendant 2 is United Breweries (Holdings) Ltd., Defendant 3 is Dr.
Vijay Mallya, Defendant 4 is Kingfisher Finvest (India) Ltd.}; In the case it was alleged that lakhs of shares were
sold and purchased among Defendant No. 2 and 4 and another group company. The sale of shares was done without
any circumstance warranting the sale and was not bona fide at all. In the order it was made clear that
“…it is necessary to lift the corporate veil of Defendant No. 4 and hold them liable for the entire
OA claim jointly and severally with defendant nos. 1 and 3. It is further stated that in the light of
the fact that Defendant no. 4 is a wholly owned subsidiary of Defendant no. 2 and that it is being
entirely controlled by Defendant no. 2 on a day to day basis; and as defendant no. 4 does not have
any independent business of substance, defendant no. 4 is also jointly and severally liable along
with Defendant nos. 1 to 3…”).
80
Press Trust of India, Banks to file objections to Heineken’s Impleadment plea in Vijay Mallya case, June 21, 2016,
available at https://economictimes.indiatimes.com/industry/cons-products/liquor/banks-to-file-objections-to-
heinekens-impleadment-plea-in-vijay-mallya-case/articleshow/52857899.cms, (Last visited on October 11, 2019).

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To settle the dues of Rs. 1746 crores to IDBI, it was pleaded to put all the group
companies on one platform and to consider Mallya as the common denominator to impose the
liability.81 Vijay Mallya’s liability was sought to be fixed by reverse piercing since by resigning
from all the companies he had eroded his net worth and hence affected his position as the
personal guarantor, through which he had initially obtained the entire sum of money from the
banks.
Similar application was also made in the Skippers Builders case,82 where a
property belonging to Tej Properties Pvt. Ltd. was attached towards satisfaction of dues of Mr.
Tejwant Singh, who was at the helm of the affairs of the company. Although the court in this
case did not explicitly use the jargon “reverse piercing”, the facts of the case evidence the
application of the doctrine. Nevertheless, the absence of a binding decision by the Supreme
Court of India on the application of this doctrine gives it only persuasive value before courts and
tribunals, with no guarantee of its usage in subsequent cases.

IV. SOLVING THE PRIORITY OF CLAIMS MATRIX

The Insolvency and Bankruptcy Code was brought into force with the main
intention of giving more power to creditors in the Indian context.83 The application of the
doctrine of reverse piercing would amount to providing additional power to creditors. Yet, it is
understandable that a conflict of priority of claims would arise amongst the existing creditors of
the corporation and the individual creditors with reverse piercing claims against it.
However, as noted earlier84 and applying the equitable principle of qui prior est
tempore, potiore est jure,85 meaning ‘he who is earlier in time is stronger in law’, we believe that
the creditors with reverse piercing claims should be either given primacy over all the rank

81
Id.
82
Debt Recovery Appellate Tribunal, (Delhi), Punjab and Sind Bank v. Skippers Builders Pvt. Ltd., II BC 124
(2016) (The bank (appellant) had sought an attachment of property No. 23 Jor Bagh, New Delhi owned by Tej
Properties Pvt Ltd. in its debt recovery application filed under the Recovery of Debt due to Banks and Financial
Institutions Act, 1993, in light of the landmark judgment of Delhi Development Authority v. Skipper Constructions
Co. Pvt. Ltd. As per the landmark judgment, the Hon’ble Supreme Court had lifted the corporate veil of Skipper
Constructions to find out Mr. Tejwant Singh and his family behind the various legal entities created to perpetrate the
fraud as noted in the judgment. Tej Properties Pvt. Ltd. was one such entity created at that time. The claim was that
since Mr. Tejwant Singh was the Certificate Debtor in all the connected recovery cases, the property currently
belonging to Tej Properties could be attached towards satisfaction of dues of Mr. Tejwant Singh. The claim was
allowed owing to the fact that once the corporate veil was lifted by the Hon’ble Supreme Court to find Mr. Tejwant
Singh behind the companies, the reverse logic also held good).
83
TK VISHWANATH COMMITTEE, Report of the Bankruptcy Law Reforms Committee, Vol. 1: Rationale and Design.
November 4, 2015.
84
Alfred Booth v. Jeremiah Bunce, 33 N.Y. 139 (N.Y. 1865).
85
State of Andhra Pradesh v. Rajah Ram Janardhana Krishna Rangarao Bahadur Varu & Ors., AIR 1966 AP 233
(India); Thirumagaral Mudaliar v. Muruga Pillai, AIR 1960 Mad 55 (India); Imperial Bank of India v. U Rai Gyaw
Thu and Co. Ltd., (1923) 25 BOMLR 1279 (India); Banarsi Prasad v. Basti Begam and Mumtaz Ahmad & Ors,
(1908) ILR 30 All 297 (India); V. Dakshinamurthi Mudaliar & Anr. v. General and Credit Corporation (India) Ltd.,
AIR 1960 Mad 328 (India); William Jacks and Co. (India) Ltd. v. Skipper Sales Pvt. Ltd., 69 (1997) DLT 36 (India);
Ramaswami Pillai v. Ramasami Naicker & Ors., AIR 1960 Mad 396 (India).

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holders in the existing hierarchy specified in §5386 or §178,87 or should be at least treated at par
with the highest ranked creditors in the hierarchy, and the division of assets should then be made
proportionately. However, §53 is applicable only if the resolution plan does not get the requisite
threshold approval of 75%, within the committee of creditors of the corporate debtor and
consequently the company goes into liquidation. Thus, in case the creditors approve the
resolution plan, the claims would be settled according to the plan as framed under Chapter X of
the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
It is thus the prerogative of the Resolution Professional to identify all such
“specific sources” of funds which would be used to meet the debt obligations. A perusal of §29A
of the Code88 can allow us to infer that since the Resolution Professional is duty-bound to ensure
that resolution applicants do not attract any of the disqualifications mentioned therein, this duty
could be extended to empower them to apply the doctrine of reverse piercing the corporate veil.
Therefore, if the Resolution Professional manages to identify, vide application of the reverse
piercing doctrine, any other additional source of fund, then the onus ought to be shifted to the
competing creditors of the two entities to amicably resolve the priority of their payment or the
proportion entitled to them. Practically speaking, it appears to be an extremely far-fetched
situation but the involvement of the Adjudicating Authority might help resolve the conflict in
light of equity, justice and good conscience. Further, considering the fact that a case for reverse
piercing may not be viable or may not always succeed in a court or tribunal, in situations where
they do succeed, it would warrant the involvement of the Adjudicating Authority and the
application of judicial mind to ensure that it is not merely a mechanical process, but a well
thought out and reasoned decision.
A point worth noting here is that under the Code, a marked shift was made from
the present priority of claims89 under the Companies Act, 2013, which we believe was done with
the sole reason to protect the interests of creditors to a greater extent and to improve the
advancement of credit in the country.90 Thus, giving more power through reverse piercing to
creditors, would only amount to strengthening their position further, which is of paramount
importance in the era of ever-piling bad loans.
In the case of In Re Phillips,91 the Supreme Court of Colorado allowed an outsider
reverse piercing claim wherein an outsider sought to hold the corporation liable for the
obligations of the debtor. Distinguishing between traditional and reverse pierce claims, the court
stated that, “in traditional veil piercing, the veil shields a shareholder who is abusing the
corporate fiction to perpetuate a wrong. In outside reverse piercing, however, the corporate form
protects the corporation which, through acts of dominant shareholder or other corporate insider,
uses the legal fiction to perpetuate a fraud or defeat a rightful claim of an outsider”.92 Thus, the

86
The Insolvency and Bankruptcy Code 2016, §53.
87
The Insolvency and Bankruptcy Code 2016, §178.
88
The Insolvency and Bankruptcy Code 2016, § 29A.
89
The Companies Act, 2013, §§ 320, 325, 326, 327.
90
TK VISHWANATH COMMITTEE, Report of the Bankruptcy Law Reforms Committee, Vol. 1: Rationale and Design.
November, 4, 2015).
91
In re Phillips, 139 P.3d 639 (Colo. 2006).
92
Id.

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thrust of the argument places the creditors of the individuals in a higher position while
considering their “rightful claim” as against the debtor.
Also, in the case of In re Mass,93 a reverse piercing claim was allowed by the
Pennsylvania court for the existence of circumstances which warranted the application. Such
circumstances were nothing but the factors, as outlined above, present in the case at hand. It also
reiterated the stance that even absent allegation of fraud or misconduct by debtor-shareholder94 a
claim of reverse piercing could be sustained under Pennsylvania law, provided such application
serves the larger public interest. Thus, irrespective of the fact that fraud exists in non-repayment
of debt or not, a creditor of the controller could still legitimately bring a claim against the
corporation and get it satisfied.
Analogously, in numerous tax recovery cases like Shades Ridge Holding Co. v.
United States,95 Zahra Spiritual Trust v. United States,96 Towe Antique Ford Foundation v.
IRS,97 the courts have treated the tax recovery agency or the government as a creditor and
placing their priority above all other creditors of the relevant corporation, have allowed outside
reverse piercing claims towards satisfaction of the tax dues. This makes for a stronger case for
the applicability of the doctrine in debt-recovery cases.
Another solution as carved out by scholars98 is that of paying from the relevant
portion of shareholding of the concerned individual controller. This prevents any impact on the
property of the company, thereby not raising any priority of claims issue. However, it is argued
that admission of a new shareholder, at least in a private corporation, being largely subject to the
decision of other shareholders as well, affects, to certain extent, the interests of the claiming
creditor.

V. EXAMINATION OF CONTROL

Another aspect which is important to examine in relation to application of the

doctrine is the control exercised by the individual over the corporation against whom a reverse
piercing claim has been brought with respect to dues of such individual. The judges in Nicholas
v. Nicholas99 held that in case of one person or very closely held corporations, it is easier to
relate the actions of an individual with that of the company. Thus, in such cases, the debts of an
individual can be easily claimed against the corporation.

93
In re Mass, 178 B.R. 626 (Bankr. N.D. Pa 1994).
94
The judgment noted that “…The Court further cannot find that there was any intentional scheme or fraud
committed by the individual Debtors on any creditor of this estate. They, at all times, used the proceeds of the
account in question as their own individual account to pay off their personal debts including those debts associated
with the business…”. See Id., 5.
95
Shades Ridge Holding Co. v. United States, 888 F.2d 725 (11th Cir. 1989).
96
Zahra Spiritual Trust v. United States, 910 F.2d 240 (5th Cir. 1990).
97
Towe Antique Ford Foundation v. Internal Revenue Service, 999 F.2d 1387 (9 th Cir. 1993).
98
Michael Richardson, The Helter Skelter Application of the Reverse Piercing Doctrine, 79 U. CIN. L. REV. 1605
(2011).
99
Mary Anthony Nicholas v. Brian Nicholas, (1984) FLR 285 (United Kingdom).

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However, in larger private corporations or in public companies, the person with

the highest shareholding or asserting the maximum influence over the decisions of a corporation
is considered to be in control of the corporation. In India, no specific test exists as to the
determination of control as clarified by the Securities and Exchange Board of India (‘SEBI’)
through its notification dated 8 September, 2017,100 where it clearly mentioned that no bright line
test exists for such determination, and control ought to be determined on a case to case basis,
making it a question of fact.
Applying the criteria as discussed above would aid in the determination of control
of an individual over the corporation. For example, it becomes clear that one who actively makes
his firm engage in activities for his personal benefit, or commingles his individual and corporate
funds, uses corporate property for personal uses, ought to have considerable control and
influence over the working of the corporation.
Moreover, even if the person does not own any shares, equitable ownership,101 as
mentioned previously, aids in identification of the control. The degree and nature of influence
over the decisions of the corporation becomes relevant in the determination of control. Thus,
overall, it depends on the evidence adduced showing the presence of the elements outlined above
and the onus is clearly upon the entity claiming reverse piercing.
On a related note, it may also be pertinent to highlight the changes brought about
under the Companies (Amendment) Act 2017, three of which we believe are relevant to our
argument. The first is the amendment to the definition of an associate company,102 where the
meaning of “significant influence” by one company over another has been amended.103
Significant influence now constitutes control of at least twenty per cent of total “voting power, or
control of or participation in business decisions under an agreement”, which provides a
numerical threshold for examining control over associate companies, which might be helpful for
courts and tribunals in examining reverse piercing claims.104 The Companies Law Committee
Report (2016) sheds light on the legislative intent behind the amendment, that is, to ensure
compliance with corporate governance requirements under the Companies Act 2013. Yet, from

100
Press Release, SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI), September 8, 2017, available at
https://www.sebi.gov.in/media/press-releases/sep-2017/acquisition-of-control-under-the-sebi-substantial-
acquisition-of-shares-and-takeovers-regulations-2011_35891.html, (Last visited on October 12, 2019) (Though the
press release talks of determination of acquisition of control in situations of substantial acquisitions of shares and
takeovers, it also states that the definition of ‘control’ as under the Companies Act, 2013 (§2(27)) and under other
laws are very similar and none provide for a bright line test. Section 2(27) of Companies Act, 2013 or Regulation
2(1)(e) provide for only an inclusive definition and do not envisage all situations of exercise of control. Further,
SEBI’s press release being only applicable to public listed and unlisted companies, determination of control in a
private limited company also remains a question of fact but in light of the inclusive definition of control under the
Companies Act, 2013).
101
In re Easton, 647 N.Y.S.2d 909 (N.Y. 1995).
102
The Companies Act, 2013, § 2(6), inserted vide The Companies (Amendment) Act, 2017 (w.e.f. January 3,
2018).
103
In order to qualify as an associate company.
104
This is only with respect to satisfaction of claims if a reverse piercing argument arises and is subject to the seven-
point guide which we have mentioned above in the article, as not all associate companies would necessarily be party
to wrongdoing. Therefore, such a claim would eventually depend on the facts and evidence adduced.

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another perspective, the expression “control over or participation in business decisions” could
be construed as bringing under its purview direct or indirect agreements and arrangements
between the corporate debtor and its associate companies for the purpose of examining claims of
reverse piercing.
The second and most significant change in our opinion is the addition of the new
§89(10), regarding the declaration of beneficial interest in any share. The provision defines
beneficial interest in a share firstly, to include “direct and indirect” rights or entitlement of
persons, secondly, to factor in ‘any’ rights in shares as “beneficial interests’” and thirdly, to
include persons who “collectively” hold beneficial interests. Although a perusal of the
Companies Law Committee Report would show that the Committee seems to have
recommended105 this in furtherance of India’s obligation to comply with Recommendations 24
and 25 issued by the Financial Action Task Force (‘FATF’) regarding transparency and
beneficial ownership of legal persons106 and legal arrangements,107 we believe that this provision
also buttresses our argument for making claims against companies in which the corporate debtor
is a beneficial shareholder. In other words, where a corporate debtor is the beneficial shareholder
in a company, an argument for reverse piercing can be made by the creditors to recover debt
owed by the corporate debtor, from the company in which it is a beneficial shareholder. From a
broader point of view, the legislature seems to have considered protection of public money to be
paramount importance. Thus theoretically, there still exists scope for making such an argument,
and if courts and tribunals are willing to extend their arms in ensuring justice and speedy debt
recovery, such application would arguably bolster the debt recovery process.
The third change under the amendment Act is in relation to §90.108 The earlier un-
amended Section dealt with investigation of beneficial ownership by the Central Government,
but the amendment has revamped the scope of the provision, and we believe that this would be
helpful in asserting a claim for reverse piercing. The amendment introduces a new concept of
“significant beneficial owner”, as an individual who acting alone or together, or through one or
more persons or trust holds beneficial interests, either directly (or together with any direct
holdings) or indirectly, of not less than ten percent in shares of a company or voting rights in the
shares, or has right to receive or participate in not less than ten percent of the total distributable
dividend,109 or the right to exercise, or the actual exercising of significant influence110 or
control111 over the company. There is indeed an effort towards covering all possible ways in
which a person can have control over a company. Furthermore, the amended rules also prescribe
comprehensive criteria for determining whether an individual would be considered as a

105
Ministry of Corporate Affairs, Report of The Companies Law Committee, 32 (February 2016), available at
http://www.mca.gov.in/Ministry/pdf/Report_Companies_Law_Committee_01022016.pdf, (Last visited on October
11, 2019).
106
The Financial Action Task Force (“FATF”) Recommendations, Recommendation 24, February 2012.
107
The FATF Recommendations, Recommendation 25, February 2012.
108
The Companies Act, 2013, § 90, inserted vide The Companies (Amendment) Act, 2017 (w.e.f. January 3, 2018).
109
Companies (Significant Beneficial Owners) Amendment Rules, 2019 (India), Rule 2(1)(h).
110
This term has not been defined in the Rules or in the Section itself. However, going by Rule 2(2) which directs
those words not defined, to the Act, we can refer to Section 2(6) of the Act, albeit in the context of an associate
company.
111
The Companies Act, 2013, § 2(27).

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significant beneficial owner (with respect to his/her indirect holdings) for the purposes of
declaring oneself as a significant beneficial owner. The Companies (Significant Beneficial
Owners) Rules specify that if a member of the reporting company is a company, the significant
beneficial owner would be the individual who holds majority stake in that member or holds
majority stake in the ultimate holding company of that member.112
A perusal of these criteria would show that the Rules do not seem to restrict the
scope of ‘beneficial interest in a share’ merely to shareholding, but also consider other forms of
control through direct and indirect through any contract, arrangement or otherwise.113 This
Section gives an inclusive and wide definition, and beneficial interest also includes those
interests not specifically mentioned in Section 90. Such an individual significant beneficial
owner is now mandated to make a declaration to the company, specifying the nature of his
interest, and the company is mandated to maintain a register of such interests that have been
declared by the significant beneficial owners.114
It may be noted here that although a juristic person like a company may declare
its beneficial interest, a significant beneficial owner who crosses the thresholds mentioned above,
must necessarily be an individual.115 The company is also given the power to give a notice to any
person whom it knows or has reasonable cause to know to be the significant beneficial owner of
the company, and also the power to apply to the Tribunal to order for restriction in the transfer of
shares and the suspension of rights attached to such shares, if it does not receive satisfactory
information from the persons to whom the notices were issued.116 Since every company must file
a return of significant beneficial owners of the company with the Registrar of Companies,
assistance from the Registrar in obtaining information on companies in which an individual is a
significant beneficial shareholder would make it easier for creditors to make a claim for reverse
piercing.
Further, this Section provides immense scope for identifying individuals who are
significant beneficial shareholders and applying the doctrine of reverse piercing to make good
the debt owed to creditors. This provision could also help reduce the effort that would have to be
undertaken by the creditors claiming their debt, or resolution professionals who have to identify
the source of funds for such repayment, an argument that was made earlier in this article. It may
be issued as a caveat that although this provision is strictly applicable to ‘individuals’, and not to
‘persons’, thereby excluding from its ambit ‘corporate’ debtors, an argument for reverse piercing

112
Companies (Significant Beneficial Owners) Amendment Rules, 2019 (India), Explanation III to Rule 2(1)(h).
113
The Companies Act, 2013, §§ 89(10), 90(1), inserted vide The Companies (Amendment) Act, 2017 (w.e.f.
January 3, 2018).
114
Companies (Significant Beneficial Owners) Amendment Rules, 2019 (India), Rule 3.
115
Companies (Significant Beneficial Owners) Amendment Rules, 2019 (India), Rule 2(h).
116
Companies (Significant Beneficial Owners) Amendment Rules, 2019 (India), Rule 7. Assuming that courts and
tribunals accept (in future) the doctrine of reverse piercing for the purpose of debt recovery (as argued in this
article), protection against defaulting investors is available under Section 58 of the Companies Act, 2013. Section
58(1) and 58(4) allows a company to refuse the registration of shares, which reasonably can be extended to refuse
the registration of transfer of shares of an investor with accounts classified as NPAs or having stressed assets.

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could nevertheless be made in the case of individuals as well, as was seen in the Kingfisher
Airlines case,117 and the Skipper Builders case.118
We can see that the Ministry of Corporate Affairs (‘MCA’) is taking active steps
to examine the real persons and individuals who are in control of organisations or who exercise
significant influence over organisations, and we hope that §90 would be extended to corporations
in the near future, so as to further help resolve the bad loan crisis, which is the need of the hour
as compared to individual debtors. The intention of discussing this Section here is to show how
the MCA has been taking steps to identify the real owner(s) and person(s) in control, and that if
extended to ‘corporate debtors’ in the future, an argument for reverse piercing could be made to
resolve the crisis.
Although the intention of the amendment may not have been to directly support
the argument that the authors seek to make in this article, we believe that they nevertheless can
serve a dual purpose and help resolve the bad loan crisis in the country. This however, depends
on the progression of the Adjudicating Authority in their decision making and approach towards
the gravity of the debt crisis in India.

VI. CONCLUSION

It is true that bad loans, owing to the scale of the debt, can easily affect the
economy at large. The application of reverse piercing in reduction of bad loans not only
improves the health of banks in the country but also strengthens the positions of various large,
medium or small creditors who are unable to bring any claims against the defaulting debtors.
Reverse piercing the corporate veil definitely provides for a remedy over and
above the present law as outlined under the Insolvency and Bankruptcy Code, 2016. With the
different cases of debt payment evasion as discussed in this article, it becomes clear that the
presence of fraud does not necessarily have a bearing on the application of reverse piercing
doctrine. Moreover, considering the need of the hour in the present economy as well as in the
interest of equity and justice, the application of the doctrine of reverse piercing, can be a solution
to reduce the burden of bad loans in the country.
It is also clear that the application of the doctrine causes aberrations in the priority
of debt claims vis-à-vis the creditors of the corporation and the personal creditors of individual
debtor. However, the very fact that a debt exists without payment gives scope for the application
of the principle. It is not our argument that a claim for reverse piercing should be readily
accepted by the Adjudicating Authorities. Rather it is our argument that where the creditors
make a plausible claim supported by strong evidence for reverse piercing, the Adjudicating
Authorities can be more proactive, and apply this doctrine to help resolve the problem.
Accepting such an argument would warrant their interference and the application of their judicial

117
Debt Recovery Tribunal, (Karnataka, Bnagalore), State Bank of India v. Kingfisher Airlines Ltd., (January 19,
2017).
118
Debt Recovery Appellate Tribunal, (Delhi), Punjab and Sind Bank v. Skippers Builders Pvt. Ltd., II BC 124
(2016).

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mind, and not merely mechanically approving or rejecting the resolution plans, which are
approved by the Committee of Creditors. Application of reverse piercing not only passes a strong
message to all persons in this country with respect to debt clearance but also further strengthens
the position of creditors, in line with the goal as envisaged by the drafters of the Code.
In the entire discussion, we have frequently advocated expansion of the reach of
the insolvency resolution process, i.e., not limiting it only to the estate of the corporate debtor.
The reason for this is that imposing such a limitation would dilute the objective of the insolvency
process, i.e., of maximisation of value for creditors. Unfortunately, the Code has put a strict
prohibition on the inclusion of the assets of any Indian or foreign subsidiary of the corporate
debtor as a part of the liquidation estate assets.119 Nevertheless, as much of this article involves
policy suggestions against the existing regulatory framework, a serious consideration of the
concept of reverse piercing would contribute immensely to speed up the Non-Performing Assets
recovery efforts in India.

119
The Insolvency and Bankruptcy Code 2016, §36(4)(d).

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