India: Chasing Shadows: Legal Proceedings Against Non-Existent Persons

Investigating the complexities of legal proceedings involving non-existent persons within corporate restructuring and mergers, this article focuses on entities that have relinquished their legal identity due to various scenarios, such as amalgamation or conversion. It highlights the challenges in pursuing legal action against these entities, given their lack of legal status and practical difficulties involved. Landmark judgments, like Principal Commissioner of Income Tax v. Maruti Suzuki (India) Limited, establish that legal proceedings against non-existent entities are null and void from the beginning. The article also examines fraud-related cases, emphasizing the importance of upholding the legal system's integrity. It emphasizes the need for alternative legal approaches and potential legislative reforms to effectively address these unique challenges.

Definition of Person

The genesis of the term 'person' traces back to the etymological roots of 'persona,' a Latin word signifying a deliberate disguise of identity when presented to the public. With further evolution, 'person' came to be understood as one who is recognized by law as having legal rights and duties. According to Salmond, a person is any being whom the law regards as capable of rights and bound by legal duties. Savigny defined 'person' as the subject or bearer of a right, while Gray elucidated it as an entity to which rights and duties can be attributed. Austin defined the term 'person' to include physical and natural persons including every being which can be deemed human.

On the legal front, Section 11 of the Indian Penal Code, 1860 ('IPC') defines 'person' to include any company or association or body of persons, whether incorporated or not. Section 2(31) of the Income Tax Act, 1961 ('IT Act') provides that 'person' includes an individual, a Hindu undivided family, a company, a firm, an association of persons or a body of individuals, whether incorporated or not, a local authority and every artificial juridical person, not falling within any of the aforementioned tags. Thus, persons may broadly be categorized as follows:

is fictitious e.g., company, corporation, organization, etc.

Concept of Non-Existent Person

Upon a cursory examination of the different aspects of the term 'person,' it becomes evident that the concept of a non-existent person differs significantly from the legal status of a deceased individual, an unborn child, or an animal.

A non-existent person can be defined as an entity that has relinquished its legal identity due to a factual scenario where there is the total absence of any ownership of rights and obligations. In this context, non-existent persons may arise as a result of the following factors:

Moreover, the processes of amalgamation or merger can be carried out through absorption or blending, both leading to the dissolution of the predecessor's legal persona and the emergence of a new legal entity under the successor's mantle.

Section 232(1)(b) of the Companies Act, 2013, provides that under a scheme of reconstruction of a company involving merger or amalgamation, the whole or any part of the undertaking, property or liabilities of any company is required to be transferred to another company or is to be divided among and transferred to two or more companies. According to Section 2(1B)(ii) of the IT Act, the term 'amalgamation' means the merger of one or more companies with another company or the merger of two or more companies to form one company in a manner that all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation. Therefore, such restructuring of entities results in the cessation of that entity and the creation of a new legal entity.

Legal Proceedings against Non-Existent Persons

Within the realm of reason and legal justification, it is not feasible to initiate a lawsuit against a non-existent person due to several factors. These include the unavailability of the party's address for serving notices or summonses, challenges in establishing and shifting the burden of proof, practical difficulties in securing the presence of the non-existent party and executing a decree against them, among others.

However, this scenario differs from cases where a party has not yet been identified, located, or has been named incorrectly. In such instances, it is the responsibility of the investigating authorities to accurately identify and locate the relevant party. Conversely, legal proceedings against a non-existent party, along with any resulting consequences are considered void ab initio, meaning they are null and void from the very beginning.

A landmark judgment in this context is Principal Commissioner of Income Tax, New Delhi v. Maruti Suzuki (India) Limited², wherein the Supreme Court held that the issuance of notice under Section 143(2) of the IT Act by the Assessing Officer against the amalgamating company (non-existent entity) was the assumption of jurisdiction constituting substantive illegality and was not a mere procedural defect that could be cured. In this case, the Supreme Court observed that the consequence of the scheme of amalgamation approved under Chapter XV of the Companies Act, 2013, is that the amalgamating company ceases to exist and upon such cessation, it cannot be regarded as a 'person' under Section 2(31) of the IT Act against whom assessment proceedings can be initiated or an order of assessment passed.

Reeling backwards from the judgment in Maruti Suzuki (supra), one can observe a series of judgments that were based on the same rationale. In the case of Spice Entertainment Ltd. v. Commissioner of Service Tax³, a Division Bench of the Delhi High Court held that an assessment conducted in the name of a company that had been amalgamated and dissolved was null and void. The Court emphasized that framing an assessment against such a company was not a mere procedural violation that could be rectified. This judgment attained finality in 2017 when the Supreme Court Bench comprising of Justice Rohinton Fali Nariman and Justice Sanjay Kishan Kaul dismissed a batch of civil appeals in this regard warranting no interference in the judgment passed by the High Court.

Thereafter, the judgment in Spice Entertainment (supra) became a binding precedent for various matters that followed. In CIT v. Dimension Apparels (P) Ltd.⁴, a Division Bench of the Delhi High Court affirmed the quashing of an assessment order against a company that had ceased to exist due to its amalgamation and clarified that the framing of assessment against a non-existing entity or person was a jurisdictional defect.

In CIT v. Micron Steels (P) Ltd.⁵, the Delhi High Court upheld the setting aside of assessment orders against the amalgamated entity on the ground that completion of assessment in respect of a non-existent company would render the assessment a nullity. CIT v. Micra (India) (P) Ltd.⁶ was also a case where the assessment was held to be contrary to law, having been completed against a non-existent company.

In all these cases, the Courts have further stated that partaking by the amalgamated company in any such proceedings does not by itself cure the jurisdictional defect as there can be no estoppel in law and hence, such proceedings would be a nullity irrespective of the fact of participation by the non-existent entity.

Indeed, a distinction should be made between legal proceedings against a non-existent entity and those against the officers associated with a non-existent entity. While legal proceedings against a non-existent entity are considered null and void from the beginning, legal proceedings against directors or officers of an amalgamating company are permitted to proceed.

Section 240 of the Companies Act, 2013 stipulates that the liability for offences committed by the officers in default of the transferor company prior to its merger, amalgamation, or acquisition remains unaffected by such actions. This provision allows for the continuation of legal proceedings against the directors or officers individually, despite the amalgamation or acquisition of the company.

This rationale is also applicable in cases where legal proceedings concerning civil and tax laws cannot be initiated or continued against companies placed under moratorium under the Insolvency and Bankruptcy Code, 2016, but they can be initiated or continued against the directors of such companies. Therefore, the liability of the officers or directors can be distinct from the legal status of the non-existent entity itself.

Other Scenarios of Legal Proceedings against Non-Existent Persons

Legal proceedings against non-existent persons can arise in other cases, for instance, cases involving fraud. A recent peculiar case before the Supreme Court sheds light on this matter. In St. Ann's Educational Society v. Lakshmi & Anr.⁷, proceedings arose from a civil suit filed by Smt. Lakshmi through her general power of attorney ('GPA') named Shri V. Sreeramulu. One of the issues framed in this suit was whether Smt. Lakshmi was a fictitious person, a matter that had not been addressed by either the trial court or the High Court.

While the trial court dismissed the civil suit seeking a permanent injunction against St. Ann's Educational Society in respect of 10 acres of land in Bangalore, the Karnataka High Court decreed the suit in favour of Smt. Lakshmi.

The facts before the Supreme Court were that Smt. Lakshmi was served through her GPA and neither of them appeared before the Supreme Court. Furthermore, when Smt. Lakshmi filed the civil suit in 1989, she was around 60 years old, which would mean she would be approximately 90 years old in 2020. Similarly, the GPA was around 80 years old when contempt proceedings were initiated against him by the Karnataka High Court in 2009, making him also around 90 years old in 2020. In the contempt proceedings before the Karnataka High Court, neither Smt. Lakshmi nor her GPA entered appearance.

Based on these circumstances, the Supreme Court concluded that the civil suit filed by Smt. Lakshmi as a non-existent person was based on a complete fraud. Consequently, the Court set aside the decree granted in her favour.

Conclusion

Dealing with non-existent persons in legal proceedings presents unique challenges. These entities have lost their legal identity, often due to corporate restructuring or mergers. Pursuing legal action against them is complicated for the reasons mentioned earlier. Courts have consistently held that legal proceedings initiated against non-existent persons are null and void at the very outset, lacking any legal effect. This clear stance reflects the understanding that such actions cannot be sustained within the framework of the law.

Moreover, cases involving non-existent persons arising from fraudulent activities, exemplified by the St. Ann's Educational Society case, underscore the complexities and repercussions involved. In such instances, where fraud is proved, courts have the authority to overturn favourable judgments or decrees obtained by non-existent persons. This is done to uphold the integrity of the Indian legal system and ensure that justice is served.

When faced with legal proceedings involving non-existent persons, exploring alternative legal avenues for securing relief becomes essential. This may involve taking action against relevant parties involved in corporate restructuring, seeking remedies through specific laws or regulations, seeking professional guidance from experienced attorneys specializing in corporate law or litigation, and legislative reforms. Lawmakers should assess the existing legal framework and introduce provisions that offer clarity, guidance, and enhanced remedies for parties involved in these cases. By doing so, the legal system can effectively handle these complex situations.

Footnotes

1. Sunil Maloo & Co., Paper on Treaties on the law of Assessment of Non-Existent Entities.

2. (2020) 18 SCC 331

3. 2011 SCC OnLine Del 3210

4. 2014 SCC OnLine Del 7588

5. 2015 SCC OnLine Del 7321

6. 2015 SCC OnLine Del 14631

7. (2020) 14 SCC 733

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.