Piercing Of Corporate Veil: Human Rights Abuses By Susidiaries And Controlled Supply Chains

WHAT IS A CORPORATE VEIL?

The term “corporate veil” is a concept which separates corporation from its shareholders, implying that both of them are separate legal entities. That means, when a liability arises out of a company’s actions, that shareholder are protected from the liability. This concept of a company being a separate legal entity was developed in the case of Salomon v. A Salomon & Co. Ltd[1897] AC 22 (House of Lords). In this case, Saloman was a shoe manufacturer. He incorporated a company A.Saloman & Co. Ltd. which had only seven subscribers. One being Saloman himself, his wife, four sons and a daughter. The business was transferred to the company for 39000 pounds. Each shareholder of the company held a share of 1pound. Within one year, the company went into liquidation. The debentures were sought to be cancelled by the liquidators. Company’s assets were not enough to discharge the debentures. The creditors contended that Saloman & Co have no independent existence. It is a single person entity and Saloman is the only person behind the company. The House of Lords refusing the contentions held that “after incorporation the Salomon and Co. Ltd. became in law a different person altogether from its members with its own rights and liabilities. So, the House of Lords has made it clear that after incorporation a company is conferred on a legal entity different from the motives or conduct of its members and promoters”. 

Therefore, a corporation is entirely different from its shareholders. This concept was widely accepted and was upheld by the courts in many judgments. In King v. Portus, it was expressly stated “The company is a distinct person from its shareholders, who are neither liable to the creditors nor do they own any interest in the property of the company”.

This concept has created a room for many not so favourable implications also. It has exempted the individuals from being personally liable for their acts in the name of the company. The company’s owner, shareholders or other subsidiaries may use this veil to cover up their own ill deeds and mala fide intentions. It has been used by the corporation and their subsidiaries to cover up their own liabilities while committing illicit acts. This veil has become a facade, a mere tool for the owners to hide behind and run from their duties and responsibilities.

CORPORATE SUBSIDIARIES AND HUMAN RIGHTS VIOLATIONS

Globalisation has a massively interconnected the world, whether it is in regards with culture or trade. This has paved a way for transnational businesses. It has very often that companies are establishing their subsidiaries in countries other than own, making it difficult for those who are suffering human rights violations at the hands of corporate subsidiaries to get compensation from the parent company.

Victims of corporate abuse face serious human rights abuses. When it comes to transnational trade, many companies establish their subsidiaries in underdeveloped countries in order to get cheaper labour. Around the world, hundreds of thousands of people, including children are facing grave human rights violations as labour class. These include forced labour and child labour as well. Children are made to work on opium fields or indulge in hazardous works such as working at a mine, mixing harmful substances such as mercury with gold ore using bare hands. 

Very often we hear factory’s catching fire, causing harm to environment and human beings. Such incidences are robbing human beings of their human rights, dignity and nature. However, in such cases, it is very easy for the corporations to escape their liability. Reason being, the inability of the sufferers to begin legal action against the parent company in their own country for the damage inflicted upon them by the subsidiary company in their own state.

In such situations where a company’s subsidiary is involved in human rights violation or transnational human rights violation, the parent company tries to distance itself from the liability hiding behind the corporate veil claiming to be a separate entity. However, it is a fact that has to be noted that howsoever far a subsidiary company has been established from the parent company, the parent company has considerably huge influence over its subsidiaries which also, includes the conduct of the subsidiaries regarding their policy concerning maintenance of human rights.

It is in these situations where the concept of corporate veil has to be ignored in order to disallow the individuals hiding behind the shelter of the veil and using the legal entity for wrongful acts and causing severe violations of human rights.

PIERCING OF CORPORTAE VEIL

The use of corporate veil provides for a multilayer insulation to the corporation from its liability. In order to make the member of the company liable in reasonable circumstances, the concept of piercing of corporate veil maybe adopted by the court. This principle was developed because the members of the company often used the corporate veil as a shelter in order to protect themselves from the liabilities of the corporation. In order to look into the realities and prevent illegal acts, it is important look beyond this veil and hold individual person liable. This is known as piercing of corporate veil.

In Life Insurance Corporation of India v. Escorts Ltd it was held by the Supreme Court that “It is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of public interest, the effect on parties who may be affected, etc”. No hard and fast rule has been prescribed for piercing of corporate veil.

When it comes to human rights, t has been guaranteed to every individual to provide equity and justice. Corporate companies shall not be provided with the privilege to do away with their liabilities under the guise of corporate veil. The legislature clearly did not intend to make the corporations immune from their criminal liabilities which violate the natural and human rights and are not in public interests. Apart from that, these activities in no manner are improving the economy.

Further, the protection of human rights of the innocent is the foremost duty of the judiciary. Therefore, as long as the circumstances are reasonable, the piercing of corporate veil in order to protect human rights is justified.

CONCLUSION

The very question that we are considerate about is whether human rights abuses by subsidiaries and controlled supply chains sufficient to pierce the corporate veil? No better ground than human rights violation can be in existence for the same. Human rights cannot be subjected to abuse. If not human rights, what else can be a greater cause to break the facade of separate entity? Would it not be ironic that in order to protect the rights of an artificial person, the rights and dignity of actual person are kept at stake. A company although recognized as an independent personality, it is an artificial person run by real human beings sitting behind the veil. And when these human beings are not following a policy in order to protect the human rights of the public at large, the veil should indeed be lifted.