Can an Executing Court Discharge a Director from Personal Liability in a Joint and Several Decree?

It is settled law that an executing court cannot go beyond the decree. The executing court must execute the decree as it has, which is of course subject to any change in circumstances which may allow the executing court power to mould the relief. Be that as it may, there are circumstances, where this principle often intersects with another settled and fundamental law i.e. a company is a separate legal entity and directors are not personally responsible for the liabilities of the company.

In commercial disputes particularly suits for recovery, apart from the company, its directors and shareholders are also arrayed as defendants in the plaint. More often than not, due to judicial oversight and poorly strategised defence, decree is passed against all the defendants, which ends up attaining finality. In such circumstances, can all or any one of the directors seek discharge from the decree before the court which is executing the decree on the ground that they are not personally liable since company is a separate legal entity.

It is settled position since the decision of House of Lords in Salomon v. Salomon and Co. Ltd.¹, that company is different/distinct legal entity, and its members are not personally liable to the creditors of the company. This is a fundamental principle of company law jurisprudence in India and over period of time, its exception i.e. doctrine of lifting of corporate veil has been evolved to make members personally liable for the actions of company in certain specific circumstances.² In Balwant Rai Saluja v. AIR India Ltd.³, the Supreme Court after referring to various decisions concerning doctrine of lifting of corporate veil held that as under:

74. Thus, on relying upon the aforesaid decisions, the doctrine of piercing the veil allows the court to disregard the separate legal personality of a company and impose liability upon the persons exercising real control over the said company. However, this principle has been and should be applied in a restrictive manner, that is, only in scenarios wherein it is evident that the company was a mere camouflage or sham deliberately created by the persons exercising control over the said company for the purpose of avoiding liability. The intent of piercing the veil must be such that would seek to remedy a wrong done by persons controlling the company. The application would thus depend upon the peculiar facts and circumstances of each case.

(emphasis supplied)

The test succinctly summarised by the Supreme Court in Balwant Rai Saluja case⁴ is the ascertainment of persons who are/were in control of the company.

However, the question still lingers that whether an executing court can entertain an objection to execution of decree on this ground and discharge a director from personal liability against whom decree has attained finality.

Section 47⁵ of the Code of Civil Procedure, 1908 (CPC) states that all questions arising between the parties relating to execution, discharge or satisfaction of decree shall be determined by the court executing the decree. Objective of Section 47 is to prevent unwanted litigation and dispose of all objections as expeditiously as possible. However, it has also led to retrial at the time of execution.⁶

The Division Bench of the Orissa High Court in Hrushikesh Panda v. Indramani Swain⁷ was seized of a similar issue where the trial court had passed a joint and several decree against Defendant 1, Company, and Defendant 2, who was the Managing Director directing them to pay the decretal amount.

Facts of the case were that the company through its Managing Director had placed various orders with the decree-holder for supply of building material. However, since the company failed to clear the dues of decree-holder, he instituted a suit against the company and the Managing Director. In the cause title of the plaint, the description of Defendant 2/Managing Director was also given as Managing Director. Averment was made in the plaint that since the Managing Director had placed the order himself, he is personally liable. The company and the Managing Director filed their common written statement, wherein inter alia personal liability of the Managing Director was also denied. However, the trial court did not frame an issue that whether the Managing Director was liable in his personal capacity, nor was there any discussion in the judgment about the personal liability of the Managing Director.

The High Court held that although an executing court cannot go behind a decree, it has jurisdiction and power under Section 47 CPC to construe a decree in order to ascertain its precise meaning. A general direction making the defendants jointly and severally liable prima facie imposes personal liability on all the defendants but is not conclusive of the question and thus empower the executing court to construe the decree and in case of doubt benefit must be given to the judgment-debtor. Since the company is a separate legal entity and the directors are not personally liable except in case of tort, fraud or breach of duty, the Managing Director/Defendant 2 cannot be held to be liable in his individual capacity and his personal properties cannot be attached.

In support of this, inference can also be drawn from the decision of the Delhi High Court in Bhandari Engineers & Builders (P) Ltd. v. Maharia Raj Joint Venture⁸, wherein the High Court directed that the executing court would first arrive at a finding as to whether there are sufficient grounds for lifting the corporate veil and only thereafter can the directors be directed to file their affidavits of assets and liabilities.

It can be concluded that the executing court has the power and jurisdiction under Section 47 CPC to determine whether a director who is individually made a defendant along with the company, is personally liable or not. However, the executing court would have to tread carefully, in order to avoid the plea being used as an abuse of process of law to frustrate the decree. The first issue the executing court would need to determine is whether the trial court has framed specific issue on personal liability of the director and rendered a determination on the same. If the trial court has framed an issue, considered material adduced by both the sides and rendered a verdict that the director is personally liable and the same has attained finality from the appellate courts, then it would be improper for the executing court to entertain objection on this ground in execution proceedings under Section 47 CPC.

However, if the trial court has not dealt with the issue and the judgment makes no discussion on the personal liability in the judgment, then it would be completely justified for the executing court to construe the decree to determine whether director is personally liable. The blueprint however, for the executing court would then be to see the plaint. First indicator would be in what manner, the director has been described in the cause title of the plaint, second indicator would be whether specific averments have been made in the plaint against the director categorically make allegations of director indulging in malfeasance, fraud or giving personal guarantee or indemnity. As held by the Delhi High Court in Mukesh Hans v. Uma Bhasin⁹, that fraud, if alleged, must be pleaded meticulously and in detail and should be proved to the hilt. A mere assertion that fraud has been committed would not suffice. Precisely and in what manner fraud has been committed is required to be delineated by the party alleging the same if the plea of fraud is to be made the basis of a decree. Bald assertions made in the plaint will not be countenanced.

Furthermore, the averments made in the plaint and the evidence led should pass the control test as specified in Balwant Rai Saluja’s¹⁰ case that the director so sought to be made personally liable by lifting the corporate veil, was actually in control of the company. This aspect is of particular relevance since corporate structure in India has conventionally been family held where spouses and/or parents are made directors and/or shareholders of the company but never exercise any actual control over the company. In case, where all such family members are also individually made defendants in the suit, the executing court would have to see the specific averment made against each of them and determine the degree of control exercised by each of them over the company in order to lift corporate veil against them and make them personally liable.¹¹