3^rd Year, B.A.LL.B.,
Rajiv Gandhi National University of Law, Patiala (India)

The Doctrine of Reverse Piercing
Although still in its infancy, the notion of ‘reverse piercing’ is a contentious area of business law. Given the circumstances in which a body corporate has several stockholders, this theory might be problematic. On the other hand, there have been instances, even in the case of single-shareholder firms, where it has provided the creditors of a shareholder with a competitive edge over those of the corporation. As a result, unlike typical veil piercing, the notion of reverse piercing is less widely accepted. Reverse piercing serves as an equitable remedy for carrying out a civil judgment, much like a fraudulent conveyance. As a result, under both of these theories, a creditor may bring a lawsuit against a company that obtained a shareholder's assets to shield the shareholder from personal culpability.
The Calcutta High Court initially made the following observation in the A.K. Khosla Case¹ : First, the accused must be able to establish mens rea, which is a requirement under criminal law. Second, he or she should be able to withstand the imposition of a mandatory prison sentence. In the Court's view, a corporation cannot be deemed to have the required mens rea because it is merely a juristic person and not a natural person. As a result, it neither possesses a mind of its own nor a physical body, therefore, it cannot be imprisoned.
The Apex Court upheld this viewpoint in the MV Javali Case², but with a few minor modifications. As a result, it was determined that a company cannot face a mandatory prison sentence or fine. A fine would be the only penalty in this situation. The courts were still reluctant to hold businesses accountable for the debts or dishonest actions of the people in charge of them, though.
There are two forms of reverse piercing: inside piercing and outside piercing. The purpose of inside piercing is to receive a profit or pay off a debt owed by the firm by the owners or insiders. It exists to serve the interests of the company. In contrast, the plaintiff in an outside reverse piercing claim aims to pierce the corporate veil to hold the corporation liable for paying off the debt of a particular shareholder. ³
This legal principle is used to hold a controlled corporation liable for the debts of another linked corporation, or to hold a subsidiary corporation liable for the debts of a parent corporation. The concept of reverse piercing first appeared in the monumental case of Kingston Dry Dock Co. v. Lake Champlain Transportation Co.,⁴ pronounced by Judge Hand.
The following things should be considered before employing the reverse piercing doctrine:

1. Taking into account the concepts of alter ego, agency, or instrumentality, the degree of identification between the member, corporate officer, or shareholder, and the corporation.
2. Considering any fraudulent or criminal intent or behavior, as well as determining whether such piercing would jeopardise innocent people using a cost-benefit analysis, are questions of public policy;
3. Whether or not an alternative solution to the problem can be discovered. If not, this equitable doctrine must be applied to accomplish fairness.

Bankruptcy Code and Reverse Piercing
On August 22, 2014, the Ministry of Finance established the Bankruptcy Legislative Reforms Commission (BLRC), which is chaired by T.K. Viswanathan (former Union Law Secretary and Secretary General Lok Sabha). The BLRC was authorised to draft a new law in the line of the Financial Sector Legislative Reforms Commission (FSLRC). The BLRC drafted law is a consolidated framework on bankruptcy that covers legal businesses along with individuals, and it aspires to be a comprehensive reform of the bankruptcy resolution process for all entrepreneurs in India.
It aims to reduce the time to resolve bankruptcy and to improve loss given default on repayment on credit. In light of the foregoing, it is expected that the ease and cost of conducting business within India will be significantly improved, as will the facilitation of requests for credit and debt securities. This is confirmed by the recognition that equity holders possess complete control over corporate actions insofar as no outstanding debt exists, while also acknowledging the potential transfer of power to creditors in the event of default. Such a shift in power has been identified as a cornerstone of the insolvency process. Notably, the insolvency laws of India have experienced a positive change as a result of the developments, and progress has been widely welcomed. The adoption of a creditor-in-control strategy by stakeholders has been instrumental in bringing about these improvements.
The Code does not directly accept the concept of reverse piercing of the corporate veil, yet it is not entirely excluded from its reach. The Supreme Court recognized in the case of Arcelor Mittal India Pvt. Ltd. v. Satish Kumar Gupta that Section 29A imports the concept of corporate veil piercing since it provides for the finding of who is in command of the corporation (at the time of submitting the resolution plan). The corporate legal entity hypothesis is also seen to be relevant in cases of group insolvency.
Under Indian insolvency legislation, creditors can currently seek recovery against the corporate debtor or the corporate debtor's personal guarantor. In reality, the court in Lalit Kumar Jain v. Union of India & Ors. decided that even when the adjudication body approves the settlement agreement, the personal guarantor remains bound. Even though the courts recognized the personal guarantor's co-extensive obligation to pay off the obligations, in Mr. Nitin Chandrakant Naik v. Sanidhya Industries LLP, the National Company Appellate Tribunal refused to include the personal possessions of the suspended directors of the corporate debtor. Similarly, the personal guarantors' assets managed by the corporation may be included in the resolution plan. In such a circumstance, courts can use reverse piercing to include such assets inside the scope of the plan.
In consequence, it has become customary to employ the technique of piercing the corporate veil in Indian insolvency law. Reverse piercing of the veil will enable courts and adjudicating authorities to look beyond the corporate debtor, which would otherwise be circumvented by the legal separation of entities. Although implementation of this idea will lead to the inclusion of assets held in the name of the personal guarantor in the resolution process, Section 18 of the Code restricts this concept solely to those assets in which the corporate debtor retains ownership rights. When using this theory in insolvency situations, several issues come up, such as the equitable distribution of assets or the priority of claims. Whether creditors with reverse piercing claims should be treated equally with the highest-ranking creditors or given preference over other rank holders as per Section 53⁵. This provision excludes corporate debtors from its scope since it only applies to individuals, not persons. Reverse piercing is therefore only useful in situations where an individual is bankrupt. In the context of a bankruptcy proceeding, a creditor who has not been paid may initiate legal action against a company, and the court may elect to pierce the corporate veil, thereby rendering the owners or shareholders liable for specific debts incurred by the business. In the absence of compelling reasons that necessitate lifting the veil in the interest of justice and equity, courts generally accord due regard to the corporate structure and its limited liability. In cases where a debtor is unable to pay off debts with personal assets alone, the creditor may try to make an alter ego claim to find a new source of money to pay off the debt. There would not be a need to pierce the corporate veil if the debtor was solvent. ⁶
According to corporate criminal liability, a corporation is held accountable for the actions of its owners. It is becoming more prevalent in India against the backdrop of businesses' expanding influence on the national economy and society at large. This gives corporate bodies more latitude to act inappropriately while also making them less susceptible to censure and embarrassment. The principle of ‘respondent superior’ is seen as the foundation for corporate criminal liability, and the Supreme Court of India has upheld the possibility of corporation liability for the actions of agents and employees that may be categorised as crimes with a significant mens rea component. The theory of attribution, which states that the criminal intent of the owner's alter ego or another individual can be attributed to the firm to place criminal accountability on the corporate body, allows for the prosecution of corporations. It was suggested in the Kingfisher Case to bring all of the group companies together on one platform and use Vijay Mallya as the common denominator to establish responsibility for setting repayment of the debt to the Industrial Development Bank of India.
Although the word ‘reverse piercing’ was not directly used by the courts in the referred cases, the facts and circumstances clearly show that this theory was applied.⁷ The foundation of corporate governance is based on the notion that a corporation is a distinct and separate legal entity from its members and stockholders, providing them with financial security. The courts eventually concluded that people frequently abuse the guarantees of limited responsibility to further their selfish ends. To attach obligations to guilty individuals who act under the protection of the corporate form, the essential rise of an equitable doctrine known as the ‘piercing of corporate veil’ was therefore welcomed. However, this theory is strictly regulated and largely accepted because maintaining distinct existence is still a regulation that shouldn't be broken frequently.
Conclusion
Legal scholars, practitioners, judges, and legal curricula have strengthened this dogma. Such a limited perspective has resulted in discredited usage that, in some circumstances, lacks direction and rarely follows logical application. One such metaphor that has encountered differences in its conception and use is the idea of through the corporate veil. Even though it is still in its infancy, this notion has permeated Indian law.
But the restriction that says a firm cannot be held criminally liable for its corporate actions unless a statute specifically calls for it still applies today. To provide the parties with a workable option in the form of a reverse piercing of the corporate veil, courts must be willing to abandon excessive reluctance.
In situations when it is possible, the Courts must accept the idea of the corporate veil’s reverse piercing. Parochial adherence to the distinct legal entity doctrine may not always meet the issues raised by today's complicated economic reality. Therefore, the hybrid method with a reverse piercing can help shape Indian corporate law, which is still in its infancy, to provide justice, equality, and stability for the current requirements of the hour.