HUMAN RIGHTS VIOLATIONS AS A GROUND TO PIERCE THE CORPORATE VEIL OF A COMPANY

ABSTRACT

The main purpose of this research paper is to shed light on the environmental crimes being done by corporations without any accountability. It is to determine the criminal liability of a company for committing crimes related to the protection of the environment. The offender of such environmental laws can be a corporate entity or a natural person. However, the determination of who gets the blame and becomes liable for the crimes is a huge conflict that is constantly being debated in the legal community. It’s a fact that natural persons hide behind the corporate veil because of the limited liability offered to them such as the major industrial companies[1]. These industrial companies dominate without the fear of being questioned therefore this paper seeks to research and find out the real take and position of such corporations’ criminal liability hiding behind the veil of corporate veil.

LITERATURE REVIEW

Corporate criminal responsibility may be characterized as a crime performed by persons, or groups of people committing certain acts or omissions prohibited by status and guilty of the good of the business or of others outside the company, in order to promote a mutual interest or benefit in their work. In some cases, the principle of keeping a company accountable was not applied in some cases, since it is an abstract legal person.[2] This is not punishable because there has been a lack of employees as a company, which is not a true person. The objective of the said paper is to bring to light the multifarious human rights violations that have been undertaken by huge multinational corporations in the garb of making unlawful gains and hiding behind the defense of corporate veil for the several environmental law violations committed by them.

Thus, in this paper I have reviewed certain companies in India and abroad, which have been rampantly violating the environmental law for gaining additional profits as well as highlighting certain laws, which deal with the same. The current literature on corporate criminal responsibility further illustrates major concerns surrounding the enforcement of corporate mens rea or criminal liability, arguing that through different rules, benefits and rights, the government has given companies considerable freedoms and security mechanisms.

The first company to be reviewed and brought to light is Chevron Corporation, The case of Chevron-Texaco in Ecuador is one of the world's most significant oil contaminations since it continues to impact the region where the company worked from 1964 to 1992. Chevron-Texaco is also well renounced. The region affected includes the areas around the wells, the stations that processed the extracted crude and the environments to which the oil was discharged directly without some kind of protective measure. Contaminated water, soil and air – the whole ecosystem are the repercussions of this destructive methods used by the industries

In the prevalent literature on the topic of research, Ritwik Jaiswal noted in his study article that the theory of total liability alone was found to be inadequate in the Indian context to offer justice for those caused by industrial incidents involving the Bhopal Gas Tragedy, as he claims that it was not just the Union Carbide Corporation, In order to fully grasp the notion of obligation in many ways that an corporation can have, this concept is essential for the analysis of the subject at hand.[3]

Limited Literature

The research paper's main objective is to study the Corporate Liability of the corporations in relation to the Environmental Laws. But this paper is not exactly focusing on the current situation as it is going to study it on the basis of the past cases and literature. The paper is restricted to a past view and has not taken any recent developments of the topic at hand into consideration due to lack of research and literature available on it. With many amendments, including the Environmental Impact Assessment Bill, 2020 and the improvements brought on by the new COVID-19 pandemic in the activity and transparency of companies worldwide, the popular study material has not been able to keep up with the current times, especially in the light of Indian environmental law.

RESEARCH METHODOLOGY

The research paper has used a qualitative method and the data was collected from various other literatures presented by different people. In order to gain more knowledge on the same various environmental laws were looked upon in detail and were compared to the legislation provided in Companies Act 1956 Understanding these viewpoints and ideologies will be a basis for the development and resolution of research issues. The objective of this small survey is to know if people are aware of the environmental impacts of the fast fashion industry and if after knowing the facts and statistics will they adopt a more careful approach to make their next purchase.

Analysis of the survey

The fashion industry has a devastating impact on the environment. In fact, it is the second largest polluter in the world, just after the oil industry and the environmental damage is increasing as the industry grows.

The survey collected 22 responses, most of them being between the age of 18-50 years. The survey collects the data and the opinions of people regarding these multinational corporations and whether they are aware of the illicit activities these corporations do to earn profit and hide behind the garb of corporate veil to save face.

In the current times, online shopping is the most preferred because of the fear of the pandemic. As consumers worldwide buy more clothes, the growing market for cheap and fast items takes a toll on the environment. Online methods, though considered safe and easy, have increased the use of plastic and unsustainable packaging. Production of clothes has doubled since 2000.

The above chart clearly shows how popular fast fashion is nowadays. In most of the countries in which garments are produced, untreated toxic wastewaters from textile factories are dumped directly into the rivers.

The above chart shows that most of the people when asked answered yes when asked if they know the implications of shopping, however the minority stated that they did not have any idea which shows that people are still either in denial or not educated or aware enough.

Most of the people when asked if the brands should be answerable and held responsible for all the damage they cause answered yes, almost everyone is aware of climate change. Clothing has clearly become disposable. As a result, we generate more and more textile waste. Synthetic fibers, such as polyester, are plastic fibers, therefore non-biodegradable and can take up to 200 years to decompose. Synthetic fibers are used in 72% of our clothing.

In recent years, there’s been an explosion of resale culture. Young people pushed this renaissance by subscribing to the trend of individuality. Second-hand stores and yard-sales used to carry a stigma, but nowadays everyone is searching for something unique. The fact that a vintage Nike windbreaker could cost less than a sandwich is an added bonus. People have taken the opportunity to decide for themselves what is ‘cool’ and ‘in style,’ excited by the chance of stumbling upon gold. Such is the appeal to thrifting as an alternative to fast fashion, particularly among Generation Z.

Lastly, the majority showed that they would purchase fast fashion if the fast fashion industry claims to abide by the environmental laws in place and keeps climate change in check.

INTRODUCTION

The Companies Act, 2013 of India gives meaning to the term company as a business composed by a legal individual or a group of legal persons, which act as an artificial legal entity to generate profits through commercial activities.

The concept of corporate veil

The legal concept of veil of incorporation separates the corporation's personality from that of its shareholders and it protects the shareholders from being held personally liable for the debts and obligations of the company.

A company is considered a separate legal entity but the fact that it acts through its human agents that compose it can’t be not considered and neglected as anything illegal or fraudulent activity can’t be done by an artificial identity. Thus, the rights, liabilities and cases imposed on the company should be dealt by the company as a distinct legal entity or as an artificial person and should not be imposed on any of the stakeholders of the company. The same concept was upheld in the British case of Saloman V. Saloman and Co. LTD.[4] However the protection or immunity provided is not certain and a court of law can hold the shareholders personally liable for the company’s responsibilities and obligations if it ascertains that the company’s business was not conducted within the governing law of the state. In such cases the veil is removed to identify the people actually guilty, this concept is known as lifting of the corporate veil. It is to be noted that even with the court of law allowing the veil to be lifted, this concept of veil of incorporation is still prevalent and piercings of the veil are just exceptions to this law.[5]

Lifting of the corporate veil

The corporate personality of a company is often times taken advantage of and used to commit frauds and other illegal activities, the shareholders hide behind the law in plain sight as it is a fact that an artificial entity or person can’t be capable of doing fraudulent or illegal acts, for the law to be just in these cases, the corporate veil of the company is removed to hold the shareholders accountable for such acts, so a shareholder is held liable for the debts and obligations despite the limited or separate liability. Direct liability and secondary liability are the two main ways through which a company becomes liable. Direct liability is for direct infringement by the company and secondary liability is for the acts committed by the human agents acting in the course of their employment.[6] The shareholders also use the concept of limited liability as a motive to form a corporation as by this doctrine, a shareholder of a company can lose only what he/she has contributed in the name of shares to the company and nothing more than that. The concept of limited liability and lifting of the corporate liability can’t possibly co-exist.

Why is the topic important for research?

The evolution and the reality of the unveiling of the corporate veil has come to the forefront recently as the environmental laws have started getting more stringent and there has been a lot of uproar in the climate change activists community, countries worldwide have started asking for more transparency and accountability as most of the industrial countries have been conducting certain illegal and fraudulent activities which have been in blatant disregard of the environmental laws in place. They have been reaping benefits of resources that they aren’t legally allowed to use or pollute at the cost of climate change. The board of directors and the other stakeholders of the company are hiding in plain sight behind the front of the company being a legal entity on it’s own claiming that they should not be held liable for the acts of the company as a company is equal to a natural person in law even though all activities are done by the humans composing it. Thus it becomes important that we bring light on to this topic and it's about time that the huge corporations in India and all around the world start taking responsibility for their actions and be held liable for their blatant disregard of the governing environmental laws of the state. This violation deserves to be brought to the forefront by penetrating the corporate wall set up by the corrupt, shattering the laws protecting such people from being held liable. This will be further discussed in the paper by using examples of different corporations and an empirical study of these corporations to shed light on their strategies to get away with as little liability as possible.

OBJECTIVE OF THE RESEARCH

● The key objective of the said research paper is to shed light on the growing environmental law violations that multinational corporations are continuously inflicting on people around the world, by hiding behind the mask of corporate veil.

● To do an empirical study on the environmental laws by corporations.

● To discuss whether environmental law violation can be termed as a sufficient cause to unveil the corporate veil of a corporation.

Thus, this paper aims to scrutinize corporate liability when it comes to large-scale environmental destruction and how the Courts have responded to it.

ANALYSIS

The concept of unveiling of the corporate veil was first spoken about in 1897, in the case of Saloman V Saloman and co, where the House of Lords did not uphold it and they considered the company to be a separate entity from its owners and stakeholders. But over the period of time this perception was developed and looked into further in several cases such as Woolfson v. Strathclyde and Adams Vs. Cape Industry Plc Leaves. In these cases, it was stated that the corporate veil of the company could be lifted in certain situations where there has been illegal or fraudulent handling on part of the shareholders or the people responsible. Therefore, the concept of lifting the corporate veil had gained importance in the common law of England.

Saloman v. Saloman & Co.

Mr. Aaron Salomon was a sole trader in leather and boot work, he set up a company in which he and his family members were made shareholders in his company. The company collapsed and went into liquidation within a year, as their debentures couldn’t be paid in full.

The creditors approached the House of Lords to get back their dues and contended that the debentures were liable to get canceled. They claimed that Solaman’s company wasn’t an independent entity and didn’t exist on its own, this argument was rejected in court and it was held that the incorporation was done to limit liability by separating the person from the company.[7]

In the landmark case of Saloman v. Saloman, a significant principle was established known as the separate legal identity, in this case a company was allowed to have its own distinct identity and legal personality, separate from its shareholders by the House of Lords in 1897. The Indian company law adopted the principle and states that a company in law is equal to a natural person.

Exceptions to the doctrine

In some circumstances the court has allowed the corporate veil to be lifted - fraudulent acts are being committed by using the company as an instrument. In the landmark case of Gil ford motor company ltd. v. Horne[8] and jones v. Lipman[9]The courts have upheld that if the main or primary objective of a company is to commit some sort of fraud or illegal acts the veil is to be pierced and the people behind the corporation must be held liable for such acts.

● Enemy character of the company - the court lifted the corporate veil of the company. The people running the company were German and their country at that time was at war with the UK. So to prevent dealing with the opponent the veil was pierced in this case.[10]

● Set up with the motive of avoiding legal obligations- it becomes important to lift the veil of the corporate when the stakeholders hide behind the laws to conceal facts.[11]

● Evasion of tax by the company- in such an instance the company is set up with the object of claiming tax benefits and avoiding taxes. The corporate veil can be pierced in such cases[12]

● One economic entity- in the current scenario, the court held that the case of salomon might be disregarded on the grounds of justice and equity. This occurs when companies can’t be distinguished from their parent company. In the case of DNH food items the parent company was given compensation for appropriation of land that belonged and was registered under the name of its subsidiary.

● Company is an agency for shareholder’s illicit interest

● Statutory provisions

● Public interest- this ground is to be focused on when the greater good of the public is concerned, companies that engage in hazardous activities are held liable. In the case of Daimler co ltd v. Mainland tire & rubber co. ltd. A UK court lifted the veil of corporation as people of Germany were running the company and at that time UK had an ongoing war with Germany. So in the interest of its citizens the court decided to pierce the veil.

Indian law

The Indian company law follows more or less the same structure and the provision followed by the English law and thus does consider the notion of lifting of the corporate veil. It can be seen undoubtedly in the case of DDA v. Skipper Construction Co. Pvt, where it stated that the concept of corporate entity was evolved to encourage and disseminate trade and its commercialization but definitely not to commit illegal activities or to defraud people. The corporate veil can be lifted when the corporate individuality such as the stakeholder, owners, board of directors and the parent company are found to be opposed to justice, and interest of the revenue or workman or is against the public interest.[13]

In the Indian legal scenario the lifting of corporate veil has been discussed in several cases where the court has decided for and against the lifting of the corporate veil such as in cases like Tata Engineering Locomotive Co. Ltd. v. State of Bihar and others, where the court was against lifting of the corporate veil and in cases such as LIC of India v. Escorts Ltd, DDA v. Skipper Construction Co. Pvt and the Bhopal gas tragedy, where the justice system was in favor of lifting the corporate veil and according punishment to the people behind the company for the fraudulent and unlawful acts.

Environmental liability - piercing the corporate veil

For shareholders, land ownership does not require a common condition of gain and liability. While a traditional business scenario is one in which an investor takes financial risks resulting in the upward or downward recession of that investment, providing a reasonable economic balance, the rules of company law have created a situation in which shareholders are granted considerable powers over the company's course, stand to make disproportionate gains, but are not financially responsible for their act. The 'corporate veil' has posed two significant environmental threats: it allows corporations to engage in reckless behavior in order to realize full profits and subsidies destructive acts, putting the burden of costs on the public purse and victims of environmental degradation in excess of the company's share capital.

Essentially, it violates the concept of liability for environmental damage and contradicts the principles of tort law based on economics and rights. However, the statute ignores the division of personalities and lifts or pierces the veil of incorporation in specific and exceptional circumstances. This work attempts to prove that corporate action to reduce or prevent potential liability was taken where liability has been correctly assigned. This is suggested as an incentive to companies to implement environmental principles into the corporate management model by efficiently minimizing their effect on the environment. The approach of the veil piercing is being used more frequently. Alternatives to veil piercing to strengthen the existing framework of responsibility for environmental damage are also presented in view of the fact that commercial companies must not be substantially relaxed.

Chevron Corp. v. Yaiguaje - Global Enforceability of Environmental Justice

A subsidiary company has its own corporate personality distinct from the holding company and cannot be an agent of the parent company.[14] The holding company owns a controlling stock of the subsidiary company but may have an entirely separate business and entity. Section 2 (87) of the Companies Act lays down the conditions in which a company may be considered as the subsidiary of another.

Oil exploitation and extraction activities in the eastern part of Ecuador occurred between 1964 and 1992 in a number of oil companies, including Texaco Inc. These acts contributed to contamination of the environment. The case of Chevron-Texaco in Ecuador is one of the world's most significant oil contaminations since it continues to impact the region where the company worked from 1964 to 1992. Chevron-Texaco is also well renounced. The region affected includes the areas around the wells, the stations that processed the extracted crude and the environments to which the oil was discharged directly without some kind of protective measure. Contaminated water, soil and air – the whole ecosystem are the repercussions of these destructive methods used by the industries. It is estimated that Texaco spread 18 billion gallons of water formation directly into bodies of water over 28 years, at a rate of about 10 million liters of contaminated material a day and 16 800 million gallons of crude oil — about 30 times more oil leaking out in Alaska in the 1989 Exxon Valdez tragedy. Outdated combustion equipment has also contributed to gas burning into the atmosphere for 6,667 million cubic meters. The destructive levels of pollution caused unforeseeable ecosystem damages. The subsistence agriculture and fishing of the victims was damaged and polluted which heavily affected indigenous communities.[15]

Finally, in 2015, the Supreme Court of Canada released a critical decision in the case of Chevron Corp. v. Yaiguaje[16] after 8 months of deliberation. This decision acknowledged unanimously that Canada was responsible for the implementation of the ruling by plaintiffs representing the interests of 30 000 indigenous peoples and other inhabitants of the rainforest region of Ecuador, who had endured decades of unstable environmental contamination caused by multiple oil operations in Chevron, Ecuador. The claims by the plaintiffs demanded compensation and reparations for the intentional environmental substandard activities of Chevron Corp, that destroyed part of the Amazon rainforest in Ecuador.

Additionally, the Court's decision acknowledged the now normal practice of decreasing commercial assets by establishing subsidiaries in countries with more favorable legislation in an attempt to sabotage the responsibility of the company. This phenomena, with branches in 72 countries operating and multiple legal façades, is illustrated ideally by Chevron Corp. who can rely on misunderstanding and escape justice. Judges have the authority and duty to consider whether an entity is a single entity at its decision-making center.

Chevron and its owners appear to be best off taking responsibility for the losses incurred instead of having to spend large amounts in the fight against the lawsuit. Should the Afectados dominate over Chevron Canada's properties, it would make it clear that there was little security from the 'cover' which supposedly protects subsidiary companies from the parents' sins. A final ruling against Chevron will also serve as the symbol for fighting global oil companies in general, demonstrating that environmental justice across national frontiers can be successful and that a flood of new allegations can theoretically be ignited. [17]

The Canadian decision is relevant not only in the case of the Ecuadorian complainants, but also for other persons fighting against Chevron, for example in the United States, Panama, Colombia, Suriname, Brazil, Peru, Nigeria, Angola, Belgium, Kuwait, the Philippines and Kazakhstan, Thailand.

Bhopal Gas tragedy

The Bhopal Gas Disaster is possibly the first instance in which the Court specifically answered the issue of whether a holding company is responsible for the subsidiary 's environmental hazard.[18] A lethal gas leaked from a pesticide facility, which was a subsidiary of Union Carbide, in December 1984, inducing the death or serious injury of around 8,000 people. Numerous petitions against the parent company were filed in the aftermath. The case dealt with attributing liability for causing one of the world's biggest man-made environmental disasters to the parent company. Justice Seth reasoned that in the particular case , the corporate veil should be penetrated on an equitable basis where the subsidiary entities are deficient in paying victims the compensation demanded. As the parent company was based in the United States, plaintiffs sued in the United States Court against the holding company.[19] Nor did the Indian Courts specifically pierce Union Carbide 's corporate curtain, even though there was proof that the subsidiary was owned and managed by UCC. Incidentally, a similar incident occurred in France where a tanker, Amoco Cadiz, leaked oil off the coast of Northern France. The complainants filed negligence charges against the Amoco Transport subsidiary and the Standard Oil Co. parent company. Both the subsidiary and the parent company were held liable by the US District Court.

While the Corporations Act, 2013 contains some codified instances where it is possible to bring down the corporate veil, in most cases the courts are allowed to determine when this veil warrants piercing.[20] This has left precedents sometimes inconsistent or vague. The Indian Courts stressed the facts and circumstances of each case to be investigated and then decided whether to remove the veil or not. In cases of piercing the corporate veil, conventional corporate liability still holds high. In Novartis v. Adarsh Pharma[21], where there was evidence of misuse of the company for unjust and unethical reasons, the Court expressed its reservations about lifting the corporate veil, holding that they would still need to evaluate the facts of the case. While the Court's unwillingness to transcend the conventional corporate liability standard can be appreciated, the fact is that corporations have already had a major adverse environmental impact. As noted, having control in an area of law that has either not been thoroughly investigated or left vague has allowed many transnational companies to go scot free.[22]

The solution is not to abolish limited liability, but to extend the scope of cases in which the corporate veil is withdrawn. Attributing responsibility to holders forces businesses to internalize, but take no action, the environmental threats they might be aware of. Many subsidiary companies in India have been set up. Because of their environmental harm the Bhopal Gas Disaster places a great deal of importance on the subsidiaries, but the parent corporations demand liability exemptions because they are distinct from the subsidiary.[23] Therefore, if these subsidiaries' corporate veils can be broken to keep the parent corporations accountable is something that needs to be dealt with.

CONCLUSION

It is important to use the principle of separate legal identity to protect the responsibility for widespread economic and environmental harm. This paper illustrates the legal loophole in assigning environmental responsibility to parental firms. India is already forward here, but the interests of those affected by unlawful actions of corporations may well be better secured when the concept of corporate liability has been properly established. Recent protests were, for example, against Sterlite, not only as a subsidiary, but the holder, Vedanta Group. Sterlite was also opposed.

In the sense of Thoothukudi recently launched acid Leak, the Indian Courts appear to pierce the subsidiary 's corporate veil and keep the parent company responsible for its development of corporate liability.[24] However, it is not certain if the specific situation warrants the lifting of the veil, in the absence of a comprehensive code or guidelines. Meanwhile, corporate responsibility must be understood to be the rule in cases of environmental harm, as it would threaten corporate entities. As we precipitate irreversible harm to the climate, multinational corporations should be granted higher accountability.[25] This ensures that environmental regulations are not violated simply so they can avoid accountability, particularly if they own subsidiaries in developed countries. Courts shall use the doctrine of the veil for reasons of public interest in close association with the doctrine of total liability.

-- [1] Anubhav Pandey, Lifting the Corporate Veil – Provisions under the Companies Act, 2013, IPLEADERS, (AUG 11, 2017), https://blog.ipleaders.in/corporate-veil/ [2] Robert B. Thompson, Unpacking Limited Liability: Direct and Vicarious Liability of Corporate Participants for Torts of the Enterprise, 47 VAND. L. REV. 1 (1994) [3]Meredith Dearborn, Enterprise Liability: Reviewing and Revitalizing Liability for Corporate Groups, CALIFORNIA LAW REVIEW, VOL. 97, NO. 1 (FEB., 2009), PP. 195-261. [4] Salomon v. Salomon and Co. Ltd. [1897] AC 22. [5] Robert B. Thompson, Unpacking Limited Liability: Direct and Vicarious Liability of Corporate Participants for Torts of the Enterprise, 47 VAND. L. REV. 1 (1994) [6] The Corporate Veil and when it can be pierced, LAW PATH, (Sept 13, 2017), https://lawpath.com.au/blog/corporate-veil-can-pierced [7] Salomon v. Salomon and Co. Ltd. [1897] AC 22 [8] (1933) Ch. 935 C.A. Horne. [9] (1962) 1 WLR 832 L. [10] Daimler Co Ltd. v. Mainland Tire & Rubber Co. Ltd., [1916] 2 AC 307. [11] Prest v Petrodel Resources Ltd. [2013] UKSC 34; Woolfson v Strathclyde Regional Council, [1978] SC (HL) 90 [12] Vodafone International Holdings B.V. v. Union of India, (2012) 6 SCC 613. [13] Peter Muchlinski, Limited liability and multinational enterprises: a case for reform?, CAMBRIDGE JOURNAL OF ECONOMICS, VOL. 34, NO. 5, Corporate Accountability and Legal Liability: On the Future of Corporate Capitalism (September 2010), pp. 915-928 [14] Adams v Cape Industries Plc [1990] Ch 433. [15] 954 F. 2d 1279 (7th Cir. 1992). [16] Yaiguaje et al. v. Chevron Corporation 2017 ONSC 135 [17] Hackbridge-Hewittic & Easun Ltd. v. G.E.C. Distribution Transformers Ltd. (1992) 74 Comp Cas 543 (Mad). [18] Union of India v. Union Carbide Corp. Ltd, Bhopal Gas Claim Case No.113 of 1986). [19] 954 F. 2d 1279 (7th Cir. 1992). [20] Evelina Singh, Parent Company Liability for Environmental Disaster Caused by Subsidiary Company, IMPERIAL JOURNAL OF INTERDISCIPLINARY RESEARCH (IJIR), 2, Issue 7, 2016. [21] 1995 SCC (1) 478. [22] Indian Council for Enviro-Legal Action v. Union of India, (2011) 8 SCC 161. [23] M.C. Mehta v. Shriram Food and Fertilizer Industries, I.R. 1987 S.C. 1086. [24] B. Tilak Chandar, Thoothukudi in for a catastrophe, says Vedanta, THE HINDU, (June 20, 2018), https://www.thehindu.com/news/national/tamil-nadu/thoothukudi-sterlite-plant-sulphuric-acid-leak-severe-says- vedanta/article24211334.ece [25] Meredith Dearborn, Enterprise Liability: Reviewing and Revitalizing Liability for Corporate Groups, CALIFORNIA LAW REVIEW, VOL. 97, NO. 1 (FEB., 2009), PP. 195-261.

This article is written by Divya Anand of Symbiosis Law School.