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The corporate veil: an overview and update from recent cases

Daniel Baker

What is the “corporate veil”?

A key feature of a limited company under English law is that it exists as a separate legal entity. As such, the company itself assumes responsibility for its own debts and liabilities, rather than the independent directors and shareholders.

Although, directors and shareholders who are part of a limited company can be held responsible for any debts and liabilities the company has accrued. Therefore, it is important that you know what you may be accountable for in certain circumstances.

Does the corporate veil protect shareholders from liability?

Whilst a company and its assets are usually considered separate from other legal processes, there are situations where a court may ‘pierce the corporate veil’ by intervening and forgoing usual practice. This usual practice refers to the ability to look beyond the separate legal personality of the company, find liability elsewhere.

An example of these specific situations, and the circumstances that lead to them, can be found in the Supreme Court case of  Prest v Petrodel Resources Ltd [2013] UKSC 34 . The case involved divorce proceedings, with an assessment made of Mr Prest’s assets, some of which were held by companies under his ownership. Mr Prest was ordered to satisfy a lump sum payment of £17.5 million to his wife by way of transfer of 7 properties under ownership of 2 companies believed to be under his control.

The court considered piercing the corporate veil in order to treat the companies’ property as effectively Mr Prest’s property and to facilitate the transfer from the companies to Mrs Prest. The court decided upon a method with which to confirm the circumstances in which a company is not considered a separate entity and another party may be liable.

The person (i.e. shareholder) is:

• under an existing legal obligation or liability or is subject to an existing legal restriction; and
• they deliberately evade the obligation/liability/restriction, or whose enforcement they deliberately frustrate by interposing a limited company under their control. 

In summary, standard practice is only avoided and the corporate veil pierced when the court concludes that a limited company’s legal personality is being abused to avoid liability. In the case of Mr and Mrs Prest, it was assessed that there was no impropriety in the way her husband used the companies to hold the assets so the corporate veil was not pierced. However, the court held that Mr Prest was clearly the beneficial owner of the properties and ordered the property transfer to Mrs Prest by operation of the Matrimonial Causes Act 1973.

The Prest test made it possible for a court to pierce the corporate veil solely for depriving the company or its controller of the advantage which they would otherwise have obtained by the company’s separate legal personality. However, it is important to note that if there is another legal remedy available then the piercing of the corporate veil will not be necessary or available.

Does the corporate veil protect directors from liability?

Compared to shareholders, directors are far less likely to gain protection from having the corporate veil pierced. This means that it is far more vital that any directors of a limited company fully understand the risks involved as well as the possibility of incurring personal liabilities under statute. Examples include for offences of fraudulent or wrongful trading, or involvement in approving transactions at an undervalue (accountable under the Insolvency Act 1986). In more recent times there are examples of a number of further statutory duties imposed on directors extending personal legal liability – such as under the Data Protection Act 2018 and the Enterprise Act 2002.

Directors also face the risk of incurring liability in circumstances where they acted in the management of the company when disqualified. In relation to bankruptcy matters, trustees in bankruptcy are able to seek court approval to pierce the corporate veil in respect of companies operated by an undischarged bankrupt.

For example, in the case of  Wood and another v Baker and others [2015] EWHC 2536 (Ch) , a trustee succeeded in obtaining an injunction and freezing the business and assets of third party companies which were interposed and operated by an undischarged bankrupt to conceal monies properly belonging to him.

How can directors and shareholders learn from recent commercial cases testing the resilience of the corporate veil?

The resilience of the corporate veil was tested in the 2019 Court of Appeal case of  Rossendale Borough Council v Hurstwood Properties Ltd [2019] EWCA Cov 364 . The case focused on payments of business rates and the use of special purpose vehicle (SPV) companies to avoid rate liability. Hurstwood Properties Ltd owned a number of business premises in various locations and formed SPV companies to which it leased the properties. Not long after the incorporation of the SPV companies, they were placed into compulsory liquidation. Legislation provides that the ‘ owner ‘ party who has the immediate legal right to actual physical possession of the property is the ratepayer.

Therefore, in the case of leasehold properties, liability for rate payment rests with the tenant. It is important to note that an exemption from liability for rates applies if the “owner” is in liquidation. As such various schemes are utilised by property developer companies creating similar SPVs for the purpose of both (a) granting a lease and then (b) subsequently placing the SPV into liquidation. As a test case, in retaliation for widespread rate-avoidance measures, local authorities led by Rossendale Borough Council brought forward a claim against Hurstwood. RBC sought a court declaration on grounds that the corporate veil should be lifted to impose liability for the business rates on Hurstwood as the freeholder and landlord.

The court refused to make such a declaration and ruled that, although accepting that the SPV companies may potentially have been created for an ethically dubious purpose in avoiding a charge to business rates, the practice was not illegal and the companies had not been interposed to avoid an existing legal obligation. In reaching its decision the court applied the Supreme Court’s  Prest test.

However in the case of  Inter Export LLC v Townley [2019] EWCA Civ 2068  – the court found that the corporate veil could be pierced so that directors could be personally liable for fraudulent misrepresentation. The case involved a director, Ms Townley, making false representations about a company’s ability to pay $1.2m for a shipment of sunflower oil. The fact of Townley’s inability to pay was not discovered until after the goods had been shipped – owing to the deliberate and criminal fraud of Ms Townley.

Therefore, the court held that Ms Townley was personally liable for the deceit involved in making representations which led to the contract, even though on the face of it the representations were made by the company itself.

The Courts are prepared to pierce the corporate veil in clear cases of individual wrongdoing. Individuals should be under no illusion about believing that the law or constitution of a company will provide absolute protection from liability.

At the same time, as highlighted by the Rossendale case and specifically in the context of SPVs reducing liability to business rates, courts have permitted the use of schemes of an ethically dubious nature, provided such actions do not contravene the established test set by the case of Prest. If this test is complied with, the corporate veil remains intact and undisturbed.

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Understanding The Doctrine Of Lifting The Corporate VeiL

• September 16, 2023

Table of Contents

Introduction.

In the intricate world of business law, the doctrine of “Lifting the Corporate Veil” is a concept that holds immense significance. It’s a legal principle that can have far-reaching consequences for business owners and investors. In this comprehensive article, we’ll delve into the depths of this doctrine, exploring its origins, applications, and the pivotal role it plays in modern business jurisprudence.

What is the Doctrine of Lifting The Corporate Veil

The Doctrine Of Lifting The Corporate Veil is a legal concept that allows the courts to disregard the corporate personality and look beyond the legal façade of a corporation or business entity. A company is a legal entity having a separate identity from the persons incorporating it. A company’s separate legal entity is a legal privilege that should be used only for lawful business activities. The people involved are not allowed to hide behind the corporate personality when a fraudulent and dishonest use of the legal entity is made.

During these times the court can use the Doctrine of Lifting the Corporate Veil to serve justice. This concept enables the court to overlook a company’s independent legal personality and hold its shareholders or directors accountable for the actions or debts of the company on an individual basis. If the court is satisfied that the members or the individuals in control of the firm are accountable for the debts and liabilities of the corporation, the court will assume that there was no entity distinct from the members and take action accordingly. The shareholders cannot ask for lifting the veil for their purposes.

Some of the provisions contained in the Companies Act, 2013 in relation to Doctrine Of Lifting The Corporate Veil include:- Section 7(7) which deals with punishment for incorporation of company by furnishing false information; Section 251(1) which deals with liability for making fraudulent applications for removal of name of the company from the register of companies and Section 339 which deals with liability for fraudulent conduct of business during the course of winding up.

Origins of the Doctrine of Lifting the Corporate Veil

The origins of the Doctrine Of Lifting The Corporate Veil can be traced back to various legal precedents and historical developments. One of the foundational cases that established this principle is Salomon v. Salomon & Co. Ltd. in the United Kingdom. In this case, Mr. Salomon, a sole proprietor, incorporated his business, and the House of Lords ruled that the company was a separate legal entity from Mr. Salomon himself. This case laid the groundwork for the concept of corporate personality but also paved the way for exceptions to this principle.

Circumstances under which Doctrine of Lifting the Corporate Veil can be Invoked

The courts may decide to lift the corporate veil under specific circumstances. While the criteria may vary by jurisdiction, some common scenarios of applying the Doctrine of Lifting the Corporate Veil include:

• Fraud or Wrongful Conduct:

If the corporate structure is used to perpetrate fraud or engage in wrongful conduct, the courts may intervene to hold the individuals responsible. This is often seen in cases where a company is used to defraud creditors or hide assets. Here the Doctrine Of Lifting The Corporate Veil can be applied.

• Alter Ego or Sham Companies:

When a company is deemed an “alter ego” or a mere sham created to serve the interests of its owners or shareholders, the corporate veil can be pierced.

• Statutory Violations:

Violations of specific statutes or regulations can lead to the lifting of the corporate veil. For instance, if a company fails to maintain proper corporate records or adhere to statutory formalities, it may lose the protection of limited liability.

• Group Enterprises:

In cases involving a group of companies, the courts may lift the veil to determine the economic reality of the group’s structure and relationships among its members.

• Justice and Equity:

In exceptional circumstances where justice and equity demand it, the courts may pierce the corporate veil to prevent injustice or unfairness.

Implications of Lifting the Corporate Veil

Understanding the implications of the Doctrine Of Lifting The Corporate Veil is crucial for business owners, investors, and legal practitioners:

• Personal Liability:

When the corporate veil is lifted, individuals behind the company can become personally liable for its debts and obligations. This can have significant financial repercussions.

• Creditor’s Rights:

Creditors seeking to recover their claims may pursue the personal assets of shareholders or owners when the veil is lifted, providing them with an additional avenue for recourse.

• Deterrent Against Abuse:

The doctrine serves as a deterrent against the misuse of corporate structures for fraudulent or wrongful purposes. It reinforces the principle that companies must be operated transparently and within the bounds of the law.

• Complex Business Structures:

Business owners need to be aware of the potential for the veil to be lifted, especially in complex business structures. Careful consideration of corporate formalities and adherence to legal requirements is essential.

Modern Applications of the Doctrine of Lifting the Corporate Veil

In contemporary business and legal landscapes, the Doctrine of Lifting the Corporate Veil continues to be relevant. It often comes into play in cases involving multinational corporations, subsidiaries, and complex corporate structures. For instance, in cases of environmental violations, tax evasion, or fraudulent activities, courts may look beyond the corporate structure to identify those responsible.

Cases where Doctrine of Lifting the Corporate Veil can be Applied

Separate Personality of the Company can be disregarded and Doctrine Of Lifting The Corporate Veil can be applied in the following cases:

• In case of commission of fraud or improper conduct, courts have lifted the veil and looked at the realities of the situation. If a Company has been created or is being used for any illegal activities then the courts may disregard the separate legal status of the company and hold those behind the company responsible for their deeds.

In the case of Jones v. Lipman, (1962) I. W.L.R. 832, The plaintiff, Mr. Jones, and the defendant, Mr. Lipman, had made a deal for the sale of a property. But before the deal was finalized, Mr. Lipman made the decision to back out by transferring the property to a newly created business that he solely controlled.

As a result, Mr. Jones sued Mr. Lipman and asked for either damages or the particular performance of the sale contract. According to the court, Mr. Lipman’s actions were an obvious attempt to get out of his obligations under the terms of the sale contract. The property’s transfer to the recently established company was viewed as a “device” to get out of the contract and safeguard Mr. Lipman’s interests. The court determined that Mr. Lipman had violated Mr. Jones’ rights by taking advantage of the company structure.

The Doctrine of lifting of the corporate veil was used by the court. The court didn’t take into account the company’s separate legal status and held Mr. Lipman personally accountable for the terms of the sale contract. In essence, the court pierced through the corporate veil to stop Mr. Lipman from using the corporation to circumvent his contractual duties.

• Where a corporate’s appearance is merely a tool of the agency. This refers to a situation in which a company is only working as an agent or instrument for another person or entity. In such circumstances, the corporation form is employed as a front or cover to conduct the principal’s business or operations behind the scenes.

In the case Jones v. Guildford [1952] 1 All E.R. 615, it was observed that In India, an American firm produced a film under the name of a British company, 90% of the capital of which was held by the President of the American company that sponsored the film’s creation. The Board of Trade declined to register the film as a British film, claiming that the English business was only acting as the nominee of the American corporation.

• When business conduct violates public policy, courts pierce the corporate veil to protect public policy. When it is deemed necessary to avoid misuse or defend the broader public interest, courts may overlook a company’s independent legal existence and pierce the corporate veil to protect public policy interests.

Adams v. Cape Industries plc [1990] Ch 433, The topic of lifting the corporate veil in the context of health and safety requirements was addressed in this case tried in the English High Court. The court ruled that when a parent business assumed responsibility for ensuring compliance with safety standards and had control over the relevant operations, it might be held accountable for its subsidiary’s health and safety duties.

• If the personnel in de facto control of a company are resident in an enemy country or are acting under instructions from or on behalf of the enemy, the company will be considered to have enemy character. In such cases the Doctrine of lifting of the corporate veil.

In Connors Bros. v. Connors (1940) 4 All E.R. 179, In this case, the House of Lords concluded that the corporation was a “enemy” company since the people in charge of its affairs were from Germany, which was at the time at war with England. The said company was not permitted to carry out the action since doing so would have entailed giving money to the enemy, which was regarded monstrous and against “public policy.”

• If it is shown that the main goal of the business’s formation was to evade taxes, the Court will disregard the concept of separate entity and hold the persons involved accountable to pay the taxes that they would have paid but for the formation of the company.

In Vodafone International Holdings BV v. Union of India” (2012) SC 2: The acquisition of shares in an Indian corporation by a foreign entity was the subject of this court case. Here the Supreme court looked into how a complex corporate structure including offshore entities was used to avoid capital gains tax. The court removed the corporate veil and taxed the transaction, underlining that the corporation form was used to dodge tax duties.

As a result, in appropriate instances, the Courts overlook the distinct corporate personality and look behind the legal person or lift the corporate veil.

The Doctrine of Lifting the Corporate Veil serves as a cornerstone of business law, balancing the benefits of limited liability with the need for accountability. It underscores the importance of corporate transparency and adherence to legal requirements. Whether you are a business owner, investor, or legal practitioner, understanding this doctrine is paramount in navigating the intricacies of modern business jurisprudence. As business practices evolve and become more sophisticated, the doctrine will continue to shape the boundaries of corporate liability and ensure that justice prevails in the realm of commerce.

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Lifting of Corporate Veil under the Companies Act, 2013

With the growing economy and trends in the corporate sector, the corporate sector has faced many frauds, insider trading, and false claims, etc. The doctrine of the lifting of the corporate veil plays an important role in identifying the offenders who do these crimes and hide behind the curtains of the company. The doctrine of a separate legal entity plays the same role as that of the lifting of the corporate veil but in a much broader sense. The concept of a separate legal entity itself is the cause of action or reason behind the members of any given company or an organization commit the crimes and hide behind the curtains of the company. This notion of hiding behind the walls of the company was removed and the true meaning of a separate legal entity was seen in many historical cases, which led to the establishment of new laws and acts. This article concentrates on what is the meaning of separate legal entity, corporate veil, and lifting of the corporate veil. The article also focuses on what circumstances the corporate veil was lifted with relevant case laws, what are the statutory provisions and judicial interpretation of the corporate veil (grounds under which corporate veil is lifted).

Introduction

Incorporation of a company is very important for the commencement of business and to have a separate legal entity. This doctrine of separate legal entity has always been exploited by the offenders. The lifting of the corporate veil is the provision available to the court, authorities, etc. to identify the offenders and also to find the true persons who control the daily affairs of the company.

Meaning and Definition of Company

Company under section 2(20) means a company incorporated under the Companies Act, 2013 or under any previous Companies Act. Company is generally a legal entity represented by a set of members or association of people, with specific objectives. The line of business structure of the company can be corporation, partnership, or proprietorship. These are the basic structure and types which decide the ownership of the company. [1]

According to Justice Marshall, “a company is an artificial person, has no physical existence. It is invisible and intangible. It exists only in contemplation of law”.

According to Justice James, “a company is an Association of persons united for a common object”. [2]

According to Justice Lindley, “a company is an association of persons, these persons contribute money or money’s worth to common stock. The common stock so contributed is money is called Capital of the company, the persons who contributed the capital are called as Members of the company. The capital is employed in some trade or business, the members share the profits and losses arsing from such business. The proportion of capital to which each member is entitled is called as his share, the shares are always transferable although the right to transfer is often more or less restricted”. [3]

Meaning and Definition of Corporate Veil

A corporate veil is a legal concept that separates the acts done by the companies and organizations from the actions of the shareholders. It protects the shareholders from being liable for the actions done by the company. This is not an absolute right the court depending on the facts of the case can take the decision whether the shareholder is liable or not.

According to the Cambridge Dictionary, “shareholders may hide behind the corporate veil, assured that their liability does not extend beyond the value of their shares”. [4]

  Company: A Separate Legal Entity (Corporate Personality)

Corporate personality is the reality expressed by the law that a company is perceived as a legal entity distinct from its members. A company with such recognition and personality will be considered as a separate legal entity having an independent legal existence from the members of the company. A company is known by its own name and has its own right, duties, obligations, and liabilities. Therefore, there is a clear difference between the company and its members, this is commonly called a Corporate Veil as discussed above.

The separate legal entity is the basic feature on which company law is premised. Establishing how a company comes into existence and how it is managed and functioned all depends on the legal entity of the company. The concept of a separate legal entity is not new and contrastingly there are many cases and litigation on this topic and on its jurisdiction. There are two very important judgments on separate legal entity one of them is Salomon vs Salomon and Lee vs Lee, both cases are foreign but are applicable and accepted universally.

• Salomon vs Salomon & Co Limited (1897)
• Salomon was running a business of boot making and leather merchant as a sole proprietorship and transferred his business to Salomon Ltd, incorporated with members comprising of his own family and himself.
• The value paid to Salomon for such exchange (transfer) was made with the assistance of shares and debentures having a floating charge on the resources of the company.
• The business was failed and was incurring losses. When the company’s business failed it went into liquidation. Salomon’s right of recovery secured through floating charge against debentures stood at a priority against the creditors of the company, they contended that Salomon and his company “Salomon Company” are one and the same.
• The liquidator on behalf of unsecured creditors, alleged that the company was fiction and was (the company) essentially an agent of Salomon.
• Salomon being the principal was made liable to pay the unsecured creditors. In simple words, the liquidator disregarded the separate personality of Salomon Ltd., particularly from its members making him liable personally for the acts of the company.
• As Salomon was the major shareholder of the company, he was made personally liable for the company’s debt. Hence, the issue was whether he is personally liable for the company’s debt, regardless of the separate legal entity of a company.

Judgement  

It was held that the company is a real and legal company, fulfilling all legal requirements. It had an identity different from its members and therefore, the unsecured creditors were to be paid at priority from the secured debentures. [5]

• Lee vs Lee Air Farming Limited (1960)
• Lee was a qualified pilot and formed a company named Lee’s Air Farming Ltd. for the purpose of carrying the business of aerial top-dressing with 3000 shares, 1 Euro each forming the share capital of the company. 2999 shares out of 3000 shares were owned by Lee himself.
• Lee was the director of the company also. He exercised unrestricted power to control the affairs of the company. He made all the decisions in relation to the contracts of the company.
• The company entered into many contracts with other companies, insurance agencies, etc for insurance of its employees. The premiums for these policies were paid from the companies’ bank account for the personal policies owned and taken by Lee and the amount was debited in the account of Lee in the companies’ book.
• Lee apart from being the director of the company was also a pilot. Lee died while piloting the aircraft during the course of aerial top-dressing.
• His widow wife claimed compensation under the New Zealand Workers’ Compensation Act, 1992 for the death of her husband in the course of his employment.
• The company claimed that Lee was the owner of the company and had the maximum number of shares in the company so his wife is not entitled to compensation.

It was held by the court that Lee was a separate person from the company he formed and his widow wife is entitled to get the compensation. This Judgement is very important with respect to Indian companies act as it lays the precedent that a company has a separate legal entity and it can enter into contracts with its own members. [6]  

Lifting of Corporate Veil (Piercing the Corporate Veil)

By a fiction of law, a company is seen as a distinct entity separated from its members, but in reality, it is an association of persons who in fact the beneficial owners of the company and its corporate property. This fiction is created by a veil and is called the Corporate veil. Lifting or piercing of corporate veil means ignoring the fact that a company is a separate legal entity and has a separate identity (Corporate personality). This concept disregards the separate identity of the company and looks behind the true owners or real persons who are in control of the company.

The separate personality of a company is a statutory privilege and it must be used for a legitimate purpose only. Whenever and wherever a fraudulent or dishonest use is made of the legal entity, the individuals will not be allowed to hide behind the curtain of corporate personality. The appropriate authority will break this shell of the company and sue the individuals who have done or committed such a crime or offence. This lifting of the curtain is called a Lifting of the Corporate veil.

Grounds under which Corporate veil is Lifted

• Where the Company is a Sham (Fraud): Gilford Motor Company vs Horne (1933)
• Mr. Horne was a former Managing Director of Gilford Motor Home Company Ltd. His employment contract stipulated a condition that he should not solicit customers of the company once he leaves his job.
• Mr. Horne was fired from his position and job. Thereafter, he established a competing company with his wife, himself, and one of his friends, who were the sole shareholders. The company established by Horne has lower price tags than that of Gilford’s company.
• The shareholders started soliciting the customers of Gilford Motor Company. Gilford did not have any legal restraints against Horne’s company, only Horne himself.
• Gilford filed or commenced proceedings against Horne individually, claiming that Horne’s company was an attempt to evade legal obligations through soliciting customers.

It was held that the company was set up to evade Horne’s contractual obligations and was used as an instrument of fraud to conceal Mr. Horne’s illegitimate actions. The court pierced the corporate veil and ordered an injunction against Horne. [7]

• Invocation of the principal of agency: RG Films Ltd (1953)
• An American company financed the production of a film in India in the name of a Britain company.
• 90% of the shares in the British Company was held by the president of an American Company. The company had no business other than its registered office and it had no staff also.
• Thereafter, the film at the time of release was refused by the Board of Trade to register it as a British film because the British company acted merely as an agent of an American company.

It was held that the decision was valid in the view of the fact that the British company acted merely as a nominee of the American company. In this case, the Corporate veil was lifted and declared that the doctrine of separate legal entity does not mean that the company will act as a mere agent of the shareholders. [8]

• Public Policy: Connors Bros vs Connors (1940)  
• In this case the acts done by the members of the company led the court to lift the corporate veil to punish the offenders as the company had been formed to accomplish an act that is against the public policy.
• The principle was applied against the managing director who made use of his position to contrary to the public policy.

The House of Lords determined the character of the company as an enemy company because the persons who were de facto who were residents of Germany, which was at war with the British during that time.

The alien company was not allowed to proceed with the action, which was directly or indirectly meant giving money to the enemy, thus was considered against the public policy. [9]

• Determining True Character of the Company: Daimler Co. Ltd vs Continental Tyre and Rubber Co. Ltd (1916)
• A private company was incorporated in England for the purpose of selling motor tires manufactured in Germany and was a German company.
• The German company has almost all of the shares in their position and all the directors of the company were Germans.
• During the First World War, the English company commenced an action for recovery of Trade debt.
• The House of Lord held that the company was an enemy company for the purpose of trading because its effective control or the management was in the hands of Germans.

The court held that it would against public policy if there is a trade among them and hence it was decided that the company will not be allowed to proceed with the action. [10]

• Protection of Revenue (Tax Evasion): CIT vs Meenakshi Mills Ltd  

The corporate veil may be ignored if the company is formed merely to evade tax. In Income Tax Commissioner, Madras vs Sri Meenakshi Mills, Madurai, the Supreme Court held that the Income Tax authorities have a right in this case to lift the corporate veil.

Sir Dinshaw Maneckji Petit (1927)

• In this case the assessee was a wealthy man enjoying large dividends and interest income. He formed 4 companies and agreed with each other to hold a block of investment as an agent for it.
• Income revived was credited in the accounts of the company but the company handed back the amount to him as a pretended loan, like this, he divided his income into 4 parts so that he can easily escape the tax liability.

It was held that the company was formed only with an intention to evade tax and the company was nothing but the assessee himself. It did not do any business, except for helping the assessee to evade tax and to have a separate legal entity to superficially receive the dividends and interest and then to hand it to them to the assessee as pretended loans. [11]

Statutory Provisions in support of Lifting the Corporate Veil  

• Reduction of number of members below the statutory minimum: If at any time the minimum number of members of a company falls below two, in case of Private company or below seven, in case of Public company; then the company can carry on the business for a period of six months while the number is so reduced, every person who is a member of the company during the time that it still continues to carry on the business, knowing the fact that the minimum number of members is reduced and the grace period of six months is also finished, then as the case may be, the company and its members will be held liable and can sue an amount which they made during those six months or else the company may be severally sued, therefore.
• Failure to refund application fee: The directors of the company shall be jointly and severally liable to repay the money (application money) with an interest of six percent per annum from the date of expiry of one hundred and thirtieth day if they fail to repay the application money without interest within one hundred and twenty days when the company fails to allot shares.
• Misdescription of company’s name: An officer of an organization (company) who signs any bill of trade, hundi, promissory note, check wherein the name of the organization isn’t referenced in the recommended way, such official can be held personally liable to the holder of the bill of trade, hundi, etc. except if it is properly paid by the company.  
• Fraudulent trading: Under section 339 of the Companies Act, 2013, If in the course of the winding-up of a company, it appears that any business of the company has been carried on with intent to defraud creditors of the company or any other persons or for any fraudulent purpose, the Tribunal, on the application of the Official Liquidator, or the Company Liquidator or any creditor or contributory of the company, may, if it thinks it proper so to do, declare that any person, who is or has been a director, manager, or officer of the company or any persons who were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Tribunal may direct. Every person who had the knowledge of such fraud will be punishable with imprisonment for a term which may extend to two years or with a fine which can extend up to fifty thousand or with both. [12]  
• For investigating company’s ownership: Under section 216 of the Companies Act, 2013, the Central Government may appoint Inspectors to investigate and report on the membership of the company for the purpose of determining the true individuals who are financially interested in the company and who control its policy. Thus, the Central Government may ignore the Corporate veil.

A company has a legal personality just like all other natural individuals, the only difference between the two is that a company even with its legal personality cannot run or conduct its affairs as a natural person does. The company acts on the concept of the corporate veil, this veil when misused for fraudulent acts will reveal the true nature and real beneficiaries of the company, thus, called the lifting of the corporate veil. The courts from time to time implemented this rule and also brought in a few changes suitable for the situations and for future reference.

[1] Corporate Veil Definition: Protecting the Corporate Veil, The Strategic CFO (2019), https://strategiccfo.com/corporate-veil/ (last visited Dec 18, 2020).

[2] Company Law, excellentcareersolution, http://excellentcareersolution.com/images/note/Company Law BCOP-302.pdf (last visited Dec 18, 2020).

[3] Kashish G, Joint Stock Company: Definition, Features, Advantages and Disadvantages Essays, Research Papers and Articles on Business Management (2018), https://www.businessmanagementideas.com/joint-stock-company/joint-stock-company-definition-features-advantages-and-disadvantages/18068 (last visited Dec 18, 2020).

[4] CORPORATE VEIL: meaning in the Cambridge English Dictionary, Cambridge Dictionary, https://dictionary.cambridge.org/dictionary/english/corporate-veil (last visited Dec 18, 2020).

[5] Salomon v Salomon – Case Summary, Law Teacher (2018), https://www.lawteacher.net/cases/salomon-v-salomon.php (last visited Dec 18, 2020).

[6] Rahul Sharma, Case Summary: Lee vs. Lee Air Farming Limited, 1960 LawLex.Org (2020), https://lawlex.org/lex-bulletin/case-summary-lee-vs-lee-air-farming-lee-limited-1960/24542 (last visited Dec 24, 2020).

[7] Gilford Motor Co Ltd v Horne [1933] Ch 935, Law Case Summaries (2019), https://lawcasesummaries.com/knowledge-base/gilford-motor-co-ltd-v-horne-1933-ch-935/ (last visited Dec 18, 2020).

[8] Rebecca Furtado, Lifting the Corporate Veil iPleaders (2016), https://blog.ipleaders.in/lifting-corporate-veil/ (last visited Dec 18, 2020).

[9] Connors Bros. Ltd. And Others v. Bernard Connors, CaseMine, https://www.casemine.com/judgement/in/56b49627607dba348f0170e6 (last visited Dec 18, 2020).

[10] Shashi Aggarwal, DAIMLER CO LTD V CONTINENTAL TYRE RUBBER CO LTD COMPANY LAW (2019), https://www.gargshashi.com/2019/08/daimler-co-ltd-v-continental-tyre.html (last visited Dec 18, 2020).

[11] Sir Dinshaw Manockji Petit v Commissioner of Income-tax on 29 November 1926 – Judgement – LawyerServices, The Tech Solution, https://www.lawyerservices.in/Sir-Dinshaw-Manockji-Petit-Versus-Commissioner-of-Income-tax-1926-11-29 (last visited Dec 18, 2020).

[12] THE COMPANIES ACT, 2013, mca.gov.in, https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf (last visited Dec 18, 2020).

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• Contributors

The Three Justifications for Piercing the Corporate Veil

Jonathan R. Macey is the Sam Harris Professor of Corporate Law, Corporate Finance and Securities Law at Yale University. The following post is based on an article co-authored by Professor Macey and Joshua Mitts of Sullivan & Cromwell LLP. The views in this post are those of Mr. Mitts and not his employer.

The doctrine of piercing the corporate veil is shrouded in misperception and confusion. On the one hand, courts understand the fact that the corporate form is supposed to be a juridical entity with the characteristic of legal “personhood.” As such courts acknowledge that their equitable authority to pierce the corporate veil is to be exercised “reluctantly” and “cautiously.” [1] Similarly, courts also recognize that it is perfectly legitimate to create a corporation or other form of limited liability company business organization such as an LLC “for the very purpose of escaping personal liability” for the debts incurred by the enterprise. [2]

Apparently inconsistent with the “limited liability” nature of the corporate enterprise, the list of justifications for piercing the corporate veil is long, imprecise to the point of vagueness and less than reassuring to investors and other participants in the corporate enterprise interested in knowing with certainty what the limitations are on the scope of shareholders’ personal liability for corporate acts. For example, veil piercing may be done where the corporation is the mere “alter-ego” of its shareholders, where the corporation is undercapitalized, where there is a failure to observe corporate formalities, where the corporate form is used to promote fraud, injustice or illegalities. [3]

In this Article we argue that there is a rational structure to the doctrine of corporate veil piercing not only in theory, but in practice as well. Our idea is that, despite the fact that courts are inarticulate to the point of incoherent in their reasoning in particular “piercing” cases; a rational taxonomy can be derived from this morass.

The entire universe of piercing cases can be explained as judicial efforts to remedy one of the following three problems. While some of these problems previously have been identified, this is the first Article is the first to identify all of the economic and policy problems that piercing attempts to ameliorate. And it is the first to present a taxonomy that can explain all of the decisions in this area, and that can be used methodologically to evaluate the quality of piercing decisions.

First, piercing the corporate veil is used as a tool of statutory interpretation in the sense that piercing the corporate veil is done in order to bring corporate actors’ behavior into conformity with a particular statutory scheme, such as social security or state unemployment compensations schemes. For example, as explained in detail in the Article, sometimes the corporate form will be ignored in order to accomplish the specific legislative goal of a government benefit program that distinguishes between owners and employees. And of course, sometimes the corporate form will be respected where doing so is necessary to reach a result that is consistent with a particular state or federal statutory scheme.

Second, piercing also is done by courts in order to remedy what appears to be fraudulent conduct that does not the strict elements of common law fraud. Specifically, it is used as a remedy for “constructive fraud” in the contractual context. Simply put, if a court becomes convinced that a shareholder or other equity investor has, by words or actions, led a counter-party to a contract to believe that an obligation is a personal liability rather than (or in addition to) a corporate debt, then courts sometimes will use a piercing theory to impose liability on the individual shareholder rather than a fraud theory.

The third ground on which courts pierce the corporate veil that we identify is the promotion of what we term accepted “bankruptcy values.” In particular, bankruptcy law strives to achieve an orderly disposition of the debtors’ assets, either through corporate reorganization or liquidation. One way that bankruptcy law achieves these goals is by preventing shareholders from transferring corporate assets to themselves or to particular favored creditors ahead of creditors in times of acute economic stress. This result is accomplished in the context of a formal bankruptcy proceeding by invoking the doctrine of equitable subordination as well as by the bankruptcy trustee’s power to avoid and set aside preferential transfers and fraudulent conveyances. Outside of bankruptcy (and sometimes in the context of bankruptcy proceedings as well), the goal of eliminating opportunism by companies in financial distress is accomplished by disregarding the corporate form.

All of the piercing cases can be explained as an effort to accomplish one of these three goals. Thus it is our view that all of the standard litany for justifications for disregarding the corporate form, which include failure to observe corporate formalities, undercapitalization, alter ego, mere instrumentality, ownership of all or most of the stock in the company, payment of dividends, failure to pay dividends, etc. are mere proxies for one of the three core reasons for piercing described above.

We demonstrate that our theory consistently explains the results in the leading cases on piercing the veil. Significantly, we find no piercing cases in which a court pierces the corporate veil solely because a corporation is undercapitalized. This finding is consistent with the fact that legislatures permit thinly capitalized firms to engage in business and generally do not require that companies be well-capitalized in order to be formed. Moreover, we find that, although courts do invoke the mantra of undercapitalization to justify a determination to pierce the corporate veil, we find that, in each case, there are other justifications for veil piercing that are consistent with our taxonomy.

We test our theory systematically by applying machine learning and automated text analysis methods to classify 9,380 federal and state cases mentioning veil-piercing or disregarding the corporate form. We show that the three goals we have identified are a superior predictor of actual veil-piercing decisions than the largely incoherent doctrines espoused by the courts. We also show that undercapitalization is actually a particularly poor predictor of veil-piercing outcomes. Most significantly in our view, we find that the application of topic modeling demonstrates that the distribution of ideas in the text of these opinions tracks our theories more or less precisely.

The full article is available for download here .

[1] Dewitt Truck Brokers v. W. Ray Flemming Fruit Co. , 540 F.2d 681 (4th Cir. 1976). (go back)

[2] Bartle v. Home Owners Co-op , 127 N.E. 2d 832 (N.Y. 1995). (go back)

[3] Baatz v. Arrow Bar , 452 N.W.2d 138 (S.D. 1990). (go back)

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Lifting of the Corporate Veil: Decoding the Doctrine of Separate Legal Personality

12 Pages Posted: 31 Jul 2020

Shaheen Banoo

Symbiosis International University, Symbiosis Law School, Pune

Date Written: July 30, 2018

“Lifting of the Corporate Veil; Departure from the Separate Personality Principle?” Solomon's case is a fountainhead of the Separate Personality Principle. Back in the year 1897 the legal world witnessed the literal interpretation of the law by the House of lords forsaking the principles of equity and fairness. However, the doctrine of the lifting of the corporate veil means moving the iron curtain a little to peek into the backstage of the company to see who're people behind the company and to also know about the real minds behind a company. The paper discusses a myriad of instances when lifting the iron curtain becomes necessary to see the backstage of a company only to appreciate the purpose of its incarnation better in the first place. The doctrine of the lifting of the corporate veil acts as a check on anyone attempting to benefit out of their wrongful acts hiding behind the company taking shelter and committing acts which the law otherwise prohibits. This paper attempts at explaining how this doctrine has challenged, and yet has helped in enriching the jurisprudence. It further provides an examination of the instances where lifting of the veil is justified for securing the ends of justice. Further, this paper constructs an analysis from the dawn of the doctrine to its present form and is divided into four parts which construct analysis of the concept, and the concomitant issues followed by the conclusion.

Keywords: Corporate Veil, Company, Doctrine of Lifting of Corporate Veil, Separate Legal Personality, Solomon's Case

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Shaheen Banoo (Contact Author)

Symbiosis international university, symbiosis law school, pune ( email ), do you have a job opening that you would like to promote on ssrn, paper statistics, related ejournals, corporate governance law ejournal.

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Home » Articles » Doctrine of Corporate Veil: Piercing And Lifting Of Corporate Veil

Doctrine of Corporate Veil: Piercing And Lifting Of Corporate Veil

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by Varsha | Oct 14, 2022 | 0 comments

Introduction

The Companies Act, 2013 provides for the definition of the term Company, under Section 2(20) of the Act as ‘company’ means a company incorporated under this Act or under any previous Company Law. Article 21 of the constitution of India provides a principle that a company has a separate legal personality. According to Professor Haney- “a company is an artificial person created by law, having separate entity, with a perpetual succession and a common seal”. The most important feature of a company is its ‘separate legal entity’ and the ‘limited liability’ of the members or the shareholders of the Company. In the case of Gallagher v. Germania Brewing Company. [1893] 53 MINN. 214, it was held by the court that for a while, by the fiction of law, a corporation is a distinct entity yet in reality, it is an association of persons who are in fact the beneficiaries of the corporate property. Any settled association has its very own legitimate personality, and which is discrete even from the character of its representatives. As clearly an organization itself is definitely not a living body and subsequently, different individuals meet up to work for the name and sake of the organization and they work on behalf or under the name of the company This is what is known as the “Corporate Veil”. The standard of the Corporate veil is a legitimate idea that isolates the character of an enterprise from the characters of its investors and shields them from being and by at risk for the organization’s obligations and different commitments. While an organization is a different lawful element, the way that it can act through human specialists that form it, can’t be disregarded. Since a fake individual is not able to do or is deceitful, the façade of corporate character could need to be taken out to distinguish the people who are truly blameworthy. This is known as the lifting of the corporate cover.

Principle Of Separate Legal Entity

The legitimate limit of the organization is confined or restricted in its degree, both by the objects of the organization and, all the more essentially, by the custom-based regulation, to exercises that are both legitimate and proper to the overall extent of its motivations. Also, inside the extent of its specific items, the organization concurred legitimate limit with respect to restrictive, legally binding and different purposes which is of the very same nature as that moved by the natural persons. This limit is altogether different from, and not got from, or related at all to, the people who at last include the organization’s participation. Thirdly, the actual organization concurred with full and autonomous procedural limits with regard to its members/ shareholders. This is what the Principle of a Separate Legal Entity is.

Doctrine Of Lifting Or Piercing Of Corporate Veil

The Doctrine of Corporate Veil is invoked when shareholders blur the distinction between the corporation and the shareholders or in other words, Under specific dire events and conditions, this corporate cover is eliminated and it is known as the ‘piercing of Corporate Veil’, which empowers the organization to check frauds committed by individuals. Hence, it’s important to be aware exhaustively what the corporate shroud is.

The best advantage of the corporate cloak and separate lawful character of organizations is the legitimate protection it stands to those running the organization. Being securely behind the cloak of fuse, the investors, individuals and overseers of an organization are normally not continued against in the main case, with activities being brought against the organization in its name, except if critical conditions exist to require the lifting of the corporate cover. It is settled that courts might lift or penetrate the corporate cover when conditions so warrant, what is less settled is, whether the equivalent should be possible by an arbitral council.

Other than the legal arrangements for lifting the corporate veil, courts additionally lift the corporate veil to see the genuine or the real situation. Nonetheless, despite the fact that the council and the courts have by and large presently permitted the corporate shroud to be lifted, it ought to be noticed that the principle of the corporate veil is as yet the standard and the cases of lifting or penetrating the cover are the exemptions for this standard.

When Directors And Personnel Are Personally Liable

In certain circumstances, the directors and the personnel working in a company are held to be personally liable for their acts. These circumstances work as an exception to the principle of the corporate veil where the company, being a legal person itself, the directors are not personally held liable or responsible. The circumstances are given below:

• In case of default of Tax liability.
• Any fraudulent activity on the part of the director, as a result of which, the company defaults its debts.
• Where the director has maliciously and fraudulently acted in such a manner which is against the interest of the company.
• Where the director fraudulently carries out the business of the company.
• Fraudulently entering into a Company Contract which is against the interest of the company.
• If the Director has not acquired his or her qualification shares within the prescribed period of time and therefore the company goes into liquidation the day after this era expires, the Director will be called upon by the Official liquidator to pay for the shares he or she was alleged to have purchased.
• Directors of a corporation are personally liable alongside the corporate for repaying the share application money or the surplus share application money received if it is not repaid within the required time period.

The Companies Act 2013 has defined ‘officer in default’, under Section 2(60). It states, “officer who is in default”, for the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise, means any of the following officers of a company, namely:—

whole-time director;

key managerial personnel;

where there is no key managerial personnel, such director or directors as specified by the Board on this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;

any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing, or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default;

any person in accordance with whose advice, directions, or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity;

every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance;

in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars, and merchant bankers to the issue or transfer;

Alter Ego Theory

The theory of Alter Ego in terms of the Corporate veil is a concept of Common Law

In the case of Tesco Supermarket Ltd. V. Nattrass , the court stated, “A corporation is a separate legal entity distinct from its members. It acts through living persons and the persons who acts for the company are not acting as an agent or a servant but are acting as alter ego as they are an embodiment of the company and their mind is the mind of the company. If it is a guilty mind then the guilt is the guilt of the company.”

In the case of International Aircraft Trading Co. v Manufacturers Trust Co. , it was laid down, “When a corporation has been so dominated by an individual or another corporation and its separate entity so ignored that it primarily transacts the dominator’s business instead of its own it will be called the individual’s alter ego. Since the business owner and the corporation are alter egos, they are merely two sides of the same coin.”

In the Iridium India Telecom Ltd. V Motorola Incorporation And Others , “The group of the persons guiding and controlling affairs of the company or corporation regarded as alter ego of the company. The criminal intent of the alter ego of the corporation i.e., the person or group of the persons that guide the business of the company would be imputed to the corporation.”

In Standard Chartered Bank and Others V. Directorate of Enforcement and Others , “A company is liable to be prosecuted for the criminal offence although act may be committedthrough its agent.”

Case Laws Related To Corporate Veil

The doctrine of the Corporate veil has significantly emerged through various judicial pronouncements by the courts of India.

Salomon v. A Salomon & Co. Ltd [1897] AC 22 (House of Lords), is a landmark case on the Lifting of Corporate veil. The court pronounced the following: “ 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 .”

In yet another case of Chloro Controls India Limited v. Seven Trent Water Purification Inc and Ors. (2013) 1 SCC 641, the court stated, “Various legal bases may be applied to bind a nonsignatory to an arbitration agreement:

The first theory is that of implied consent, third-party beneficiaries, guarantors, assignment and other transfer mechanisms of contractual rights. This theory relies on the discernible intentions of the parties and, to a large extent, on the Good faith Principle. They apply to private as well as public legal entities.

The second theory includes the legal doctrines of agent-principle relations, apparent authority, piercing of the veil (also called the alter ego), joint venture relations, succession and estoppel. They do not rely on the parties intention but rather on the force of the applicable law.” It further laid down that “a court can lift the corporate veil, however, the same can be done only in extraordinary circumstances and by following the due adjudicatory process. The Court held that in cases where the corporate façade is used to perpetrate fraud the corporate veil may be lifted by courts.”

Approving the Law as stated by Palmer and Gower, the court, in the case of Tata Engineering and Locomotive Company Ltd. V. State of Bihar , (1964) (6) S.C.R 885 laid down, ” However, in the course of time, the doctrine that the corporation or a company as a legal and separate entity of its own has been subjected to certain exceptions by the application of the fiction that the veil of the corporation can be lifted and its face examined in substance. The doctrine of the lifting of the veil thus marks the change in the attitude that law had originally adopted towards the concept of the separate entity or personality of the corporation. As a result of the impact of the complexity of the economic factors, judicial decisions have sometimes recognised exceptions to the rule about the juristic personality of the corporation. It may be that in course of time, these exceptions may grow in number and to meet the requirements of different economic problems, the theory about the personality of the corporation may be confined more and more. Gower has classified seven strategies of cases where the wheel of the corporate body has been lifted. But it would not be possible to evolve a rational consistent and inflexible principle which can be invoked in detrermin9ing the question as to whether the veil of a corporation should be lifted or not. Broadly, where a fraud is intended to be prevented, or trading with an enemy is sought to be defeated, the veil of the corporation is lifted by judicial decisions and the shareholders are attained to be “persons who actually work for the corporation .”

Veil Of Incorporation and Arbitral Tribunal

As has been stated that lifting up of the veil of the corporation is an exception which must be applied cautiously, the courts have time and again dealt with the question that whether an Arbitral Tribunal has the right to lift up the veil of incorporation.

In Sudhir Gopi vs Indira Gandhi National Open University, the court laid down,

“The jurisdiction of the arbitrator is circumscribed by the agreement between the parties and it is obvious that such limited jurisdiction cannot be used to bring within its ambit, persons that are outside the circle of consent. The arbitral tribunal, being a creature of limited jurisdiction, has no power to extend the scope of the arbitral proceedings to include persons who have not consented to arbitrate. Thus, an arbitrator would not have the power to pierce the corporate veil so as to bind other parties who have not agreed to arbitrate.”

“An arbitral tribunal has no jurisdiction to lift the corporate veil; its jurisdiction is confined by the arbitration agreement – which includes the parties to arbitration – and it would not be permissible for the arbitral tribunal to expand or extend the same to other persons. There is no quarrel with the proposition that a court could, in given cases, lift the corporate veil. This decision is not an authority for the proposition that such power could be exercised by an arbitral tribunal.”

In the case of NOD Bearings Pvt. Ltd. v. Bhairav bearing Corporation (2019) SCC OnLine Bom 366, it was stated by the court that, “ This (Lifting of Corporate Veil), I am afraid, is not permissible to an arbitral forum. It may be appropriate in a given case for a court of plenary jurisdiction to lift the corporate veil and find out the true perpetrator of the act and hold him responsible for its consequences. Even in such a case, lifting of a veil can only occur in certain specified circumstances, particularly, where a question of fraud is involved and it is necessary to ascertain who the real perpetrator of the fraud was. Other cases where the corporate veil has been lifted on judicial grounds have been to detect the enemy character of a company in times of war, to find out the substance of a transaction involving tax evasion or economic offences or other improper conduct or improper purpose. An arbitral forum, on the other hand, is bound by the contract of the parties, which creates it and the terms of submission through which the reference is made to it. Third parties, who are not parties to the contract, the arbitration agreement being a part of such contract, cannot be either arraigned to a cause or made liable for the same. In Sudhir Gopi Vs. Indira Gandhi National Open University, Delhi High Court has held that an arbitral tribunal has no power to lift the corporate veil. Only a court has the power to lift the corporate veil of a company if a strong case is made out. The mere fact that a party is an alter ego of another would not predicate an agreement to refer the disputes to arbitration by that party under an arbitration agreement of the other. The corporate veil cannot by that reason alone be lifted so as to make a party, who was not a party to an arbitration agreement, a party to the reference .”

Balmer Lawrie and Company Ltd. v. Saraswathi Chemicals Proprietors Saraswathi Leather Chemicals (P) Ltd…239 (2017) DLT 217

The Court held that an arbitral tribunal’s jurisdiction rests on the agreement between the parties and cannot proceed against non-signatories to the arbitration agreement. The Court also held that an arbitral award made against non-signatories would be “wholly without jurisdiction and unenforceable”

I.M.C. Ltd. v. Board of Trustees of Deendayal Port Trust and Ors., (2019) 3GLR 1798

“There is nothing in law which prohibits an Arbitral Tribunal from lifting the corporate veil on the basis of the doctrine of alter ego. The Arbitral Tribunal has a right to take up all disputes which a Court can undertake, except certain disputes generally treated as non-arbitrable, viz. (i) patent, trademarks and copyright, (ii) anti-trust/ competition laws, (iii) insolvency/ winding up, (iv) bribery/ corruption, (v) fraud, (vi) criminal matters. The Arbitration and Conciliation Act, 1996, does not make any provision excluding any category of disputes treating them as non-arbitrable but the Courts have held that certain kinds of disputes may not be capable of adjudication through means of arbitration.”

Argentium International Pvt. Ltd. v UTM Engineering Pvt. Ltd., IB No. 248/ND/2019

“Tribunal is also not denuded of authority to pierce the ‘corporate veil’ to ascertain the real successful bidder. Therefore, the ‘Corporate Veil’ has to be lifted to prevent unjust and fraudulent act of the respondent herein and in order to look-into realities behind the legal façade and to hold him liable to the acts of the Corporate Debtor. No doubt, the separate personality of the company is statutory privilege, but it must be used for legitimate purpose only. Whenever & wherever, if fraudulent or dishonest use is made of the legal entity, the individual will not be allowed to hide behind the curtain of the corporate personality. A duty is cast upon the Tribunal or the Court to break this shell of the company and to see who is actually benefitted by this curtain.”

Therefore, from the above case laws, it can be said that there is no certainty whether an Arbitral Tribunal has the power to lift up the corporate veil.

Conclusively, it can be stated that the Doctrine of lifting up or the piercing of the veil of incorporation is a very significant part of Corporate Law, not only in India but in corporations of most countries. It is a great example of fictional law. But, as this is a very old doctrine, it also requires changes like any other law, in order to tackle the present-day problems of corporations. The judiciary and the legislature need to make the law more unambiguous.

This article is written and submitted by Varsha Kumari Mishra  during her course of internship at B&B Associates LLP. Varsha is a law student from Law College Dehradun, Uttaranchal University.

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Paragee Patel

Case Laws pertaining to Lifting up of Corporate Veil Theory

Preamble: 

These case laws are related to the “Concept of Lifting up of Corporate Veil” in the context of Companies. Any concept can be understood in a better way with the help of citations. This Article is a compilation of case laws of the title subject for CA foundation students to help in their study of law subject.

Meaning of corporate veil:

The term corporate veil refers to the concept that members of a company are shielded from liability connected to the company's action. If the company incurs any debts or contravenes any law, the corporate veil concept implies that members should not be liable for those errors.

1. The Salomon vs. Salomon and Co Ltd.:-

Facts: .

Salomon incorporated a company named "Salomon & Co. Ltd.” with seven subscribers consisting of himself, his wife, four sons and one daughter. This company took over the personal business assets of Salomon for £ 38,782 and in turn, Salomon took 20,000 shares of £ 1 each debenture worth £ 10,000 of the company with charge on the company's assets and the balance in cash. His wife, daughter and four sons took up one £ 1 share each. Subsequently, the company went into liquidation due to general trade depression. The unsecured creditors to the tune of £7,000 contended that Salomon could not be treated as a secured creditor of the company, in respect of the debentures held by him, as he was the managing director of one-man company, which was not different from Salomon and outsiders should be paid first. The case is decided that who should be paid first by keeping in view the concept of lifting up of corporate veil. 

Provision of Law:

This question related to the concept of corporate veil theory for companies. Corporate veil concept provides that once a company is validly registered under this act it becomes a separate legal person from its members, for that purpose it is immaterial whether any member has a large or small shareholding.

Conclusion:

A company once registered becomes a separate person and therefore members of the company are also considered as a different person and can claim amount from company just like any other secured creditors. And therefore, in this case Salomon will be paid first as secured creditors.

2. Daimler Company Limited Vs. Continental Tyre & Rubber company:-

Continental Tyre and Rubber Company was incorporated in England, but the shareholders of company (except one) and also all the directors, were Germans and residing in Germany. Continental Tyre and Rubber Co Ltd supplied tyres to Daimler Company. But it was concerned with making payment to Continental Tyre and Rubber Company of Germany during World War 2 , the England court decided that Daimler should not trading with Continental Tyre and Rubber company as it was a German (Foreign enemy due to war) Company. The case has been decided in the light of concept of lifting up of corporate veil. 

Provision of Law:-

The concept of lifting of corporate veil says that a company will be regarded as having enemy character if the persons having de facto control of the company are resident of enemy country or whenever they are acting on instruction of enemy, therefore there should be a lifting of corporate veil.

During the period of war, the concept of lifting up of corporate veil shall be applied to find the enemy factor in the company. Once it can be found out then the company is restricted to trade with the other company of that country.Therefore, in this case, Continental Tyre and Rubber Company could not continue its business Daimler Company limited with in England during World War 2. 

3. Dinshaw Manekjee Petit:

Dinshaw Manekjee Petit, an assessee had a large income in the form of dividend and interest. In order to reduce his tax liability, he formed four companies named Petit Limited, The Bombay Investment Company Limited, the Miscellaneous Investment Limited and The Safe Securities Limited and transferred his investments to them in exchange of their shares. The income earned by the companies was taken back by him as pretended loan. Can Dinshaw Manekjee Petit be regarded as separate from the company he formed? 

Provision of law:

The corporate veil says that members of company are shielded from Liability Connected to the company's actions. But if the Company is created just to reduce tax liability of a person then there will be lifting of Corporate veil.

The developed principle of lifting of the corporate veil was required to be applied in this case because these four Companies are just made in order to reduce tax liability of Dinshaw Manekjee Petit. And therefore, in this case Dinshaw manekjee Petit cannot be regarded as separate from the companies he formed as they are created to reduce the liability of Dinshaw Manekjee Petit.

4. Workmen employed in Associated Rubber Industry limited Vs Associated Rubber Industry limited:-

Associated Rubber Industry Limited had invested certain amount some years back. After some years the profit and loss A/c of the company shows large amount of profit.  Thus the company is liable to pay the bonus to its workmen. To reduce this liability, Associated Rubber Industry limited company had formed wholly owned subsidiary company named Aril Holdings Limited which had no assets, no other capital except the shares of INARCO limited that had been transferred by the Associated Rubber Industry limited. It had no other business or the source of income except receiving the dividend on the shares Of INARCO limited.  So at the time of paying bonus to its workmen the company paid very small amount as bonus by saying that the company (Associated Rubber Industry limited) didn’t have large profit. In this case, The Associated Rubber Industry limited had purchased shares of INARCO. So, the workmen went to the court for their bonus. 

This question was related to the lifting of corporate veil. Accordingly, if the sole purpose of the formation of the company is just to avoid/reduce legal obligation of the company then there should be the lifting of corporate veil and the company is liable to pay his legal duty. 

If any company is formed just to reduce or avoid the legal obligation of paying the bonus to its workmen then there is a lifting of corporate veil and the company is liable to pay bonus to its workmen. So in this case also, the company Associated Rubber Industry limited is liable to pay bonus to its workmen as the company have earned large profit.

5. Merchandise Transport limited VS. British Transport commission (1982):

In this case, the principal company, Merchandise Transport Limited, a transport company applied for licence for its vehicles to British Transport Commission but due to some reason British Transport Commission rejected its application and hence the company named Merchandise Transport Limited could not applied in its name. So Merchandise Transport Limited formed a subsidiary company and applied for licence for its (Merchandise Transport Limited) vehicle. Here British Transport Commission rejected its application for licence.

This question relates to the lifting of corporate veil due to formation of subsidiaries to act as agent. Accordingly, if subsidiary company is formed just to work as an agent, member or trustee on behalf of its principal company then the holding company of that subsidiary company is directly liable for the any act of that subsidiary company. 

Holding company is directly liable for the act of that subsidiary company which is created just to act as an agent of its parent company. In this case, Merchandise Transport Limited has formed its subsidiary company just to act as an agent. So we considered the both holding and subsidiary company as separate legal entity and therefore British Transport Commission had rejected the application for licence.

6. Gilford motors co. vs. Horne

Mr EB Horne was formerly a managing director of the Gilford Motor Co Ltd. His employment contract stipulated a clause not to solicit customers of the company if he were to leave employment of Gilford Motor Co. Mr. Horne was fired, thereafter he set up his own business and undercut Gilford Motor Co's prices. He received legal advice saying that he was probably acting in breach of contract. So he set up a company, JM Horne & Co Ltd, in which his wife and a friend called Mr Howard were the sole shareholders and directors. They took over Horne’s business and continued it. Mr. Horne sent out fliers saying, The Company had no such agreement with Gilford Motor about not competing. The question arose whether Horne violated his non-compete clause by setting up his competing company or not.

This case relates to the lifting of corporate veil because of the characteristic of separate legal entity is misused. Accordingly, if the purpose of incorporation of the company is to do fraud or to contravene any law or to avoid any legal obligations (arising by way of contract) or any illegal activity then there is lifting of corporate veil and that particular person/persons are liable for punishment.

If purpose of incorporation of the company is to defeat law or avoid legal obligation then there is lifting of corporate veil. In this case Mr EB Horne have formed a company, JM Horne & Co Ltd. Just to avoid his legal obligation arise from his contract with Gilford Motor Co. So, YES Mr EB Horne had violated his non-compete clause even if writing clause of the non-competing with Gilford Motor co. 

Reason and necessity of concept of Lifting up of Corporate veil:

If the company is formed for the sole purpose of doing fraud or harm of the society, Regulatory bodies, government than there will be need of lifting up of the corporate veil to find the real beneficiary/culprit or purpose of the Company.      The author of this Article is Paragee Patel, CA Foundation Student.

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Company Law (12th edn)

• New to this edition
• Acknowledgements
• Table of cases
• Table of legislation
• 1. Introduction to company law
• 2. Corporate personality and limited liability
• 3. Lifting the veil
• 4. Promoters and pre-incorporation contracts
• 5. Raising capital: equity and its consequences
• 6. Raising capital: debentures: fixed and floating charges
• 7. Share capital
• 8. The constitution of the company: dealing with insiders
• 9. Classes of shares and variation of class rights
• 10. Derivative claims
• 11. Statutory shareholder remedies
• 12. The constitution of the company: dealing with outsiders
• 13. Corporate management
• 14. Directors’ duties
• 15. Corporate governance 1: corporate governance and corporate theory
• 16. Corporate governance 2: the UK corporate governance debate
• 17. Corporate rescue and liquidations in outline
• Select bibliography

p. 26 3. Lifting the veil

• Alan Dignam Alan Dignam Professor of Corporate Law, QC (Hon), School of Law, Queen Mary University of London and Honorary Member, 7 King’s Bench Walk Chambers
•  and  John Lowry John Lowry Emeritus Professor of Commercial Law, Faculty of Laws, UCL; Visiting Professor of Commercial Law, University of Hong Kong; and Honorary Fellow, Monash University
• https://doi.org/10.1093/he/9780192865359.003.0003
• Published in print: 02 August 2022
• Published online: September 2022

Titles in the Core Text series take the reader straight to the heart of the subject, providing focused, concise, and reliable guides for students at all levels. This chapter discusses ‘lifting the veil’, a phrase that refers to situations where the judiciary or the legislature have decided that the separation of corporate personality from the members must not be maintained. In this case, the veil of incorporation is said to be lifted. ‘Lifting’ is also known as ‘peeping’, ‘penetrating’, ‘piercing’, or ‘parting’. The chapter presents statutory examples of veil lifting, many of which involve corporate group structures and others involve straightforward shareholder limitation of liability issues. It also considers cases of veil lifting by the courts as well as classical veil lifting during the periods of 1897 to 1966, 1966 to 1989, and 1989 to the present. Four cases are highlighted: Adams v Cape Industries (1990), Chandler v Cape Plc (2012), Prest v Petrodel Industries Ltd (2013), and Hurstwood Properties (A) Ltd and others v Rossendale Borough Council and another (2021) as well as important recent case development. The chapter also examines claims of tortious liability, the liability of a parent company for personal injury, and commercial tort. Finally, it looks at the costs and benefits of limited liability.

• corporate personality
• incorporation
• veil lifting
• tortious liability
• parent company
• personal injury
• commercial tort
• limited liability

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Please note you do not have access to teaching notes, lifting the veil of incorporation under common law and statute.

International Journal of Law and Management

ISSN : 1754-243X

Article publication date: 4 February 2014

The paper examines case law and statutory provisions related to lifting the corporate veil. The aim of the paper is to explore recent case law in order to determine whether courts have moved away from an overly restrictive approach when dealing with cases relating to the corporate personality. To offer a full account of the exceptions to the corporate personality doctrine, this paper also examines cases where the veil of incorporation is lifted due to a breach of a statutory provision.

Design/methodology/approach

The paper reviews recent case law and statutory provisions relating to lifting the corporate veil. The paper critically reviews the exceptions to the corporate personality doctrine which amount to lifting the corporate veil.

The paper finds that courts are more willing to lift the corporate veil compared to before. They have moved away from the restrictive approach and this is demonstrated by the tendency to find new exceptions to the corporate personality doctrine such as the interests of justice argument or lifting the veil in tort cases.

Originality/value

The paper offers an up-to-date assessment of the exceptions to the corporate personality doctrine and highlights the growing tendency to finding new ways of lifting the corporate veil.

• Corporate personality
• Company law
• Lifting the corporate veil

Nyombi, C. (2014), "Lifting the veil of incorporation under common law and statute", International Journal of Law and Management , Vol. 56 No. 1, pp. 66-81. https://doi.org/10.1108/IJLMA-03-2013-0011

Emerald Group Publishing Limited

Copyright © 2014, Emerald Group Publishing Limited

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Lifting of Corporate Veil with reference to Leading Cases

COMPANY LAW LIFTING OF CORPORATE VEIL WITH REFERENCE TO LEADING CASE Shagun Singh 15.04.2013  NATIONAL UNIVERSITY OF RESEARCH AND STUDY IN LAW 2013 INTRODUCTION Corporate personality has been described as the ˜most pervading of the fundamental principles of company law[1]. It constitutes the bedrock principle upon which company is regarded as an entity distinct from […]

• in Company Law , Others
• as Legal Updates
• On Jun 12,2013

COMPANY LAW

LIFTING OF CORPORATE VEIL WITH REFERENCE TO LEADING CASE

Shagun Singh

 NATIONAL UNIVERSITY OF RESEARCH AND STUDY IN LAW

INTRODUCTION

Corporate personality has been described as the ˜most pervading of the fundamental principles of company law [1] . It constitutes the bedrock principle upon which company is regarded as an entity distinct from the shareholders constituting it. When a company is incorporated it is treated as a separate legal entity distinct from its promoters, directors, members, and employees; and hence the concept of the corporate veil, separating those parties from the corporate body, has arisen. The issue of “lifting the corporate veil” has been considered by courts and commentators for many years and there are instances in which the courts have negated from the strict application of this doctrine. This doctrine has been established for business efficacy, necessity and as a matter of convenience [2] .

In the doctrine of ˜ Lifting the Corporate Veil ™, the law goes behind the mask or veil of incorporation in order to determine the real person behind the mask for the purpose of holding them liable [3].

But for clarity as to ˜Lifting of the Corporate Veil™, an understanding of the corporate personality of a company is required, along with study of the provisions of Indian law that pave the way for courts to pierce the corporate veil. Various grounds for piercing of the corporate veil and elements of lifting of corporate veil analyzed through the lens of leading case laws and judgements form the crux of this project report.

COMPANY AS SEPARATE LEGAL ENTITY

The company as a separate entity was firmly established in the landmark decision in Salomon v. Salomon & Co. Ltd [4] . Salomon, a sole trader, sold his manufacturing business to Salomon & Co. Ltd. (a company he incorporated) in consideration for all but six shares in the company, and received debentures worth 10 thousand pounds. The other subscribers to the memorandum were his wife and five children who each took up one share. The business subsequently collapsed, and Salomon made a claim, on the basis of the debentures held, as a secured creditor. The liquidator argued that Salomon could not rank ahead of other creditors because, in fact, the company and Mr. Salomon were one and the same–or alternatively, that the company carried on business on Salomon’s behalf.

On appeal, the House of Lords held that Salomon & Co. Ltd. was not a sham; that the debts of the corporation were not the debts of Mr. Salomon because they were two separate legal entities; and that once the artificial person has been created, “it must be treated like any other independent person with its rights and liabilities appropriate to itself.”

In Macaura v. Northern Assurance Co. Ltd. [5] the House of Lords decided that insurers were not liable under a contract of insurance on property that was insured by the plaintiff but owned by a company in which the plaintiff held all the fully-paid shares. The House of Lords held that only the company as the separate legal owner of the property, and not the plaintiff, had the required insurable interest. The plaintiff, being a shareholder, did not have any legal or beneficial interest in that property merely because of his shareholding. In Lee v. Lee’s Air Farming [6] , the Privy Council held that Lee, as a separate and distinct entity from the company which he controlled, could be an employee of that company so that Lee’s wife could claim workers’ compensation following her husband’s death.

In Hobart Bridge Co. Ltd. v. FCT [7]  relying on the judgment by Lord Sumner in Gas Lighting Improvement Co. Ltd. v. IRC [8] , Kitto .J summarizes the position in the following manner:

“Between the investor, who participates as a shareholder, and the undertaking carried on, the law imposes another person, real though artificial, the company itself, and the business carried on is the business of that company, and the capital employed is its capital and not in either case the business or the capital of the shareholders. Assuming, of course, that the company is duly formed and is not a sham …”

More recently, the High Court in Industrial Equity v. Blackburn [9] has held that the principle operates to prevent a holding company from treating a wholly-owned subsidiary’s profits as its own. Therefore, it can be seen that there has been, and still is, the highest authority for the separate entity concept.

However, consideration has to be given to the limitations of the separate entity principle which completely denies the efficacy of the corporate entity as a legal person separate from its founders, shareholders or management. Judgements as early as the Salomon case have indicated the recognition of exceptions to the principle of separate entity by the courts. Recognition of the separate entity is possible provided there is “no fraud and no agency and if the company was a real one and not a fiction or myth. According to Lord Denning in Littlewoods Mail Order Stores Ltd. v. IRC [10] , incorporation does not fully “cast a veil over the personality of a limited company through which the courts cannot see. The courts can, and often do, pull off the mask. They look to see what really lies behind.” “A corporation will be looked upon as a legal entity as a general rule but when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime the law will regard the corporation as an association of persons.”

The two significant reasons as to why exceptions to the separate entity principle exist is that firstly, although a corporation is a legal person, it cannot always “be treated like any other independent person.” For example, a corporation is not capable of committing a tort or a crime requiring proof of mens rea unless courts disregard the separate entity and determine the intention held by the directors and/or shareholders of the corporation[11] . Secondly, strict recognition of the principle may lead to an unjust or misleading outcome if interested parties can “hide” behind the shield of limited liability. Judicial discretion and also legislative action allows the separate entity principle to be disregarded where some injustice is intended, or would result, to a third party (either internal or external to the company) with whom the company is dealing.

LIFTING OF THE CORPORATE VEIL

Lifting or piercing the veil is corporate law’s most widely used doctrine to decide when a shareholder or shareholders will be held liable for obligations of the corporation. Lifting the veil doctrine exists as a check on the principle that, in general, investor shareholders should not be held liable for the debts of their corporation beyond the value of their investment. The corporate evil is said to be lifted when the court ignores the company and concerns itself directly with the members or the managers. It is impossible to ascertain the factors which operate to break down the corporate insulation. The matter is largely in the discretion of the courts and will depend upon the underlying social, economic and moral factors as they operate in and through the corporation[12] . It can be said that adherence to the Solomon principle will not be doggedly followed where this would cause an unjust result[13] . One of the grounds for lifting of the corporate veil is fraud. The courts have pierced the corporate veil when it feels that fraud is or could be perpetrated behind the veil. The courts will not allow the Solomon principal to be used as an engine of fraud. The two classic cases of the fraud exception are Gilford Motor Company Ltd v. Horne [14] in which Mr. Horne was an ex-employee of The Gilford motor company and his employment contract provided that he could not solicit the customers of the company. In order to defeat this he incorporated a limited company in his wife’s name and solicited the customers of the company. The company brought an action against him. The Court of appeal was of the view that “the company was formed as a device, a stratagem, in order to mask the effective carrying on of business of Mr. Horne. In this case it was clear that the main purpose of incorporating the new company was to perpetrate fraud. Thus the court of appeal regarded it as a mere sham to cloak his wrongdoings.

In the second case of Jones v. Lipman  [15]  a man contracted to sell his land and thereafter changed his mind in order to avoid an order of specific performance he transferred his property to a company. Russel J specifically referred to the judgments in Gilford v. Horne and held that the company here was “a mask which (Mr. Lipman) holds before his face in an attempt to avoid recognition by the eye of equity” he awarded specific performance both against Mr. Lipman and the company. Under no circumstances will the court allow any form of abuse of the corporate form and when such abuse occurs the courts will step in.

The second ground for piercing of corporate veil covers group enterprises. Sometimes in the case of group of enterprises the Solomon principal may not be adhered to and the court may lift the veil in order to look at the economic realities of the group itself. In the case of D.H.N. Food products Ltd. v. Tower Hamlets London Borough Council  [16] it has been said that the courts may disregard Solomon’s case whenever it is just and equitable to do so. The court of appeal thought that the present case where it was one suitable for lifting the corporate veil. Here the three subsidiary companies were treated as a part of the same economic entity or group and were entitled to compensation. Lord Denning has remarked that we know that in many respects a group of companies are treated together for the purpose of accounts, balance sheet, and profit and loss accounts. The nature of shareholding and control would be indicators whether the court would pierce the corporate veil. In the case of Woolfsan [17] the House of Lords held that there was “no basis consonant with the principle upon which on the facts of this case the corporate veil can be pierced to the effect of holding Woolfson to be the true owner of Campbell’s business or the assets of Solfred, “the two subsidiary companies that were jointly claiming compensation for the value of the land and disturbance of business. The House of Lords in the above mentioned case had remarked “properly applied the principle that it is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere facade concealing the true facts” In the figurative sense facade denotes outward appearance especially one that is false or deceptive and imports pretence and concealment. That the corporator has complete control of the company is not enough to constitute the company as a mere facade rather that term suggests in the context the deliberate concealment of the identity and activities of the corporator. The separate legal personality of the company, although a “technical point” is not a matter of form it is a matter of substance and reality and the corporator ought not, on every occasion, to be relieved of the disadvantageous consequences of an arrangement voluntarily entered into by the corporator for reasons considered by the corporator to be of advantage to him. In particular “the group enterprise” concept must obviously be carefully limited so that companies who seek the advantages of separate corporate personality must generally accept the corresponding burdens and limitations.

The third ground for piercing the corporate veil is agency. In the case of Solomon v. Solomon Justice Vaughan Williams expressed that the company was nothing but an agent of Solomon. “That this business was Mr. Solomon’s business and no one else’s; that he chose to employ as agent a limited company; that he is bound to indemnify that agent the company and that this agent, the company has lien on the assets¦¦¦” However on appeal to the House of Lords it was held that a company did not automatically become an agent of the shareholder even if it was a one man company and the other shareholders were dummies.

A company having power to act as an agent may do so as an agent for its parent company or indeed for all or any of the individual members if it or they authorize it to do so. If so the parent company or the members will be bound by the acts of its agent so long as those acts are within actual or apparent scope of the authority. But there is no presumption of any such relationship in the absence of an express agreement between the parties it will be difficult to establish one. In Cape case attempt to do so failed. In cases where the agency agreement holds good and the parties concerned have expressly agreed to such an agreement them the corporate veil shall be lifted and the principal shall be liable for the acts of the agent.

The courts may pierce the corporate veil to look at the characteristics of the shareholders. In the case of Abbey and Planning the court lifted the corporate veil. In this case a school was run like a company but the shares were held by trustees on educational charitable trusts. They pierced the veil in order to look into the terms on which the trustee held the shares.

Sometimes tax legislations warrant the lifting of the corporate veil. The courts are prepared to disregard the separate legal personality of companies in case of tax evasions or liberal schemes of tax avoidance without any necessary legislative authority.

There are three components that the complainant must prove in order to pierce the corporate veil. Those elements are as follows

1.      Control and domination : Control and determination part of the test determines the relationship between the shareholder and the corporation [18] . Generally, mere majority stock ownership will be insufficient to satisfy this element. Instead, one must show “complete domination, not only of finances, but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction has no separate mind, will or existence of its own.” To determine the existence of “complete domination”, courts usually require the plaintiff to produce evidence of inadequate capitalization or undercapitalization, failure to follow corporate formalities, commingling of funds, diversion of funds or assets for non-corporate purposes[19] , etc.

2.        Improper purpose or use : This test requires the plaintiff to show that the control exercised by the parent company or dominant stockholder was “used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal right [20] .” Thus, this second inquiry focuses on the relationship between the plaintiff and the corporation. It is an explicit recognition that some improper conduct must have occurred beyond establishing that the corporation was controlled and dominated.

3.      Resulting damage or harm  [21] : In this test the plaintiff must show that the defendant’s control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered. In other words, the plaintiff must prove that, unless the corporate veil is pierced, it will have been treated unjustly by the defendant’s exercise of control and improper use of the corporate form and, thereby, suffer damages.

Therefore, the most important thing for the courts to remember while lifting the corporate veil is to exercise care to balance the competing goals of incorporation and protecting creditors.  

  STATUTORY PROVISION IN INDIA SUPPORTING LIFTING OF CORPORATE VEIL

The Companies Act[22] provides for circumstances when corporate veil will be lifted and the individual members/directors will be made liable for certain transactions. The statutory provisions are as follows:

1. Reduction of membership below statutory minimum (Section 45 of the Act): This section provides that if the number of member of a company is reduced below 7 in the case of public company or below 2 in the case of private company and the company continues to carry on the business for more than 6 months, while the number is so reduced, every person who knows this fact and is a member of the company is severally liable for the debts of the company contracted during that time.

2. Improper use of name (Section 147of the Act): Under sub-section (4) of this section, an officer of a company who signs any bill of exchange, hundi, promissory note, cheque wherein the name of the company is not mentioned in the prescribed manner, such officer can be held personally liable to the holder of the bill of exchange, hundi etc. unless it is duly paid by the company.

3. Liability for fraudulent conduct of business (Section 542 of the Act): If in the course of the winding up of a company, it appears that any business of the company has been carried on with intent to defraud the creditors of the company or any other person or for any fraudulent purpose, the persons who were knowingly parties to the carrying on of the business, in the manner aforesaid, shall be personally responsible, without any limitation of liability for all or any of the debts or other liabilities of the company, as the court may direct.

The doctrine of piercing the corporate veil is not subject to any bright line tests. Courts have struggled for years to develop and refine their analysis of these claims. However, each new action brings a different set of facts and circumstances into the equation and a separate determination must be made as to whether the plaintiff has adduced sufficient evidence of control and domination, improper purpose, or use and resulting damage. The decision whether to pierce the corporate veil may be assisted, at least in part, upon the opinion of qualified experts. In particular, expert testimony would be helpful to the trier of fact in determining whether the corporation has been adequately capitalized for its intended purpose. Ultimately, however, the judgment whether to disregard the corporate entity will be based upon a balancing of various factors all or some of which are necessary but may not be sufficient to pierce the veil. The Judgment of the Court Of Appeal in the Adams case can be said to be the current law, which is nothing more than a reiteration of the law laid down by the House of Lords in Solomon’s case. The bottom line being only the court will lift the veil in the face of grave abuse of the corporate form and not otherwise. Also the trend regarding the increase or decrease in the judicial pronouncement regarding lifting of veil of a corporate entity cannot be ascertained as each the courts view on lifting of corporate veil depends on the facts of each case.

BIBLIOGRAPHY

Primary Sources : Companies Act 1956

Secondary Sources :

• Avtar Singh, Company Law, 15 th Edition, Eastern Book Company, Lucknow, 2012
• A.K Majumdar, Company Law, Taxmann Publications, 2012
• www.indiankanoon.org
• www.vakilsearch.com
• www.business-standard.com
• www.islaw.in
• www.law-essays-uk.com
• www.businessdictionary.com

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• Companies Act 2013

Lifting of Corporate Veil

This article is written by Dhruv Bhardwaj, a student of Amity Law School Delhi; and Kishita Gupta , an advocate who graduated from the Unitedworld School of Law, Karnavati University in Gandhinagar. In this article, they will cover the concept of the Corporate Veil under the Companies Act, 2013, the need for introducing this concept and the circumstances under which the Corporate Veil can be lifted. The article covers the concept in leading nations of the world not just the Indian scenario.

It has been published by Rachit Garg.

Table of Contents

Introduction 

Once a business is incorporated according to the provisions laid out in the Companies Act of 2013, it becomes a separate legal entity. An incorporated company, unlike a partnership firm, which has no identity of its own, has a separate legal identity of its own which is independent of its shareholders and its members. This article will go over what this differentiation means, why this demarcation was brought about and how can the members be made personally liable for using the company as a vehicle for undesirable purposes. 

What is Corporate Veil 

A company is composed of its members and is managed by its Board of Directors and its employees. When the company is incorporated, it is accorded the status of being a separate legal entity which demarcates the status of the company and the members or shareholders that it is composed of. This concept of differentiation is called a Corporate Veil which is also referred to as the ‘Veil of Incorporation’.

Meaning of Lifting of Corporate Veil

The advantages of incorporation of a company like perpetual succession, transferable shares, capacity to sue, flexibility, limited liability and lastly the company being accorded the status of a separate legal entity are by no means inconsiderable, under no circumstance can these advantages be overlooked and, as compared with them, the disadvantages are, indeed very few. 

Yet some of them, which are immensely complicated deserve to be pointed out. The corporate veil protects the members and the shareholders from the ill-effects of the acts done in the name of the company. Let’s say a director of a company defaults in the name of the company, the liability will be incurred by the company and not a member of the company who had defaulted. If the company incurs any debts or contravenes any laws, the concept of Corporate Veil implies that the members of the company should not be held liable for these errors.

Basics of Limited Liability

Organizations exist to a limited extent to shield the individual resources of investors or shareholders from individual obligation for the obligations or activities of a company. Almost opposite to a sole proprietorship in which the proprietor could be considered in charge of the considerable number of obligations of the organization, a company customarily constrained the individual risk of the investors. This is why Limited Liability as a concept is so popular.

Puncturing the Veil of Incorporation commonly works best with smaller privately held companies in which the organization has few investors, restricted resources, and acknowledgement of the separateness of the partnership from its investors.

German corporate law built up various speculations in the mid-1920s for lifting the corporate veil based on “control” by a parent company over a subsidiary. Today, investors can be held subject on account of an obstruction devastating the partnership. The company is qualified for at least impartial assets. 

Rolf Serick elaborated on the phrase “durchgriffshaftung” in great detail, and numerous observers emphasised its importance. The independent entity of a firm should be ignored in some situations, as the courts had already agreed. This does not nullify the legal entity itself, even if the veil is breached. Durchgriffshaftung refers to situations not governed by statutory or other legal norms in which an entity’s existence is disregarded and the owner is held personally accountable for the company’s debts. 

In general, only if bankruptcy proceedings are started will owners be held personally accountable for the company’s debts. Hence, durchgriffshaftung is typically seen as a shareholder’s complementary and ultimate liability. From the perspective of a creditor, a shareholder’s personal obligation arising from penetrating the veil is irrelevant until the debtor company experiences financial difficulty. The facts indicating a shareholder’s obligation often don’t surface until such circumstances exist. 

German statutes such as Section 13 of the Act on Limited Liability Companies (GmbHG) and Section 1 of the German Stock Corporation Act (AktG) deal with the principles of the corporate veil and limited liability. 

United Kingdom

The corporate veil in UK company law is pierced every once in a while. After a progression of endeavours by the Court of Appeal during the late 1960s and mid-1970s to set up a straight-jacketed formula for lifting the veil, the House of Lords reasserted a universal methodology. As indicated by a 1990 case at the Court of Appeal, Adams v Cape Industries plc , the main genuine “veil piercing” may happen when a company is set up for false purposes, or where it is set up to avoid a statutory obligation. 

Tort Victims and Employees

Tort victims and representatives, who did not contract with an organization or have very inconsistent and limited dealing power, have been held to be exempted from the standards of limited liability in Chandler v Cape plc . In this leading case law, the petitioner was a representative of Cape plc’s entirely claimed subsidiary, which had gone insolvent. He effectively acquired a case of tort against Cape plc for causing him an asbestos sickness, asbestosis. Arden LJ in the Court of Appeal held that if the parent had meddled in the activities of the subsidiary in any capacity, for example, over exchanging issues, then it would be connected with obligation regarding wellbeing and security issues. Arden LJ underscored that piercing the corporate veil was a bit much in this case. The limitations on lifting the veil, found in legally binding cases had no effect.

“Single Economic Unit” Theory 

It is a proverbial standard of English company law that a company is an element isolated and unmistakable from its individuals, who are at risk just to the degree that they have added to the company’s capital: Salomon v Salomon . The impact of this standard is that the individual backups inside a combination will be treated as independent elements and the parent cannot be made obligated for the auxiliaries’ obligations on insolvency. This standard particularly applies in Scotland. 

While on the face of it, it may look like there are a lot of scenarios for “lifting” or “piercing” the veil, judicial dicta is of the view that the standard in Salomon is liable to special cases are slender on the ground. Lord Denning MR sketched out the hypothesis of the “single economic unit” – wherein the court analyzed the overall business task as an economic unit, instead of a strict legal form -in DHN Food Distributors v Tower Hamlets.  

The “single economic unit” hypothesis was in like manner dismissed by the CA in Adams v Cape Industries,   where Slade LJ held that cases, where the standard in Salomon had been circumvented, were just occasions where they didn’t have a clue what to do. The view communicated at first case by HHJ Southwell QC in Creasey v Breachwood that English law “unquestionably” perceived the rule that the corporate veil could be lifted was depicted as a sin by Hobhouse LJ in Ord v Bellhaven , and these questions were shared by Moritt V-C in Trustor v Smallbone,   the corporate veil cannot be lifted only because equity requires it. In spite of the dismissal of the “equity of the case” test, it is observed from judicial thinking in veil piercing cases that the courts utilize “fair circumspection” guided by general standards, for example, mala fides to test whether the corporate structure has been utilized as a simple device. 

Perfect Obligation

In the landmark case of Tan v Lim,   where an organization was utilized as a “façade” (per Russell J.) or in common layman terms, to defraud or to swindle the lenders of the respondent and Gilford Motor Co Ltd v Horne , where an order was conceded against a merchant setting up a business which was simply a vehicle enabling him to evade a pledge in limitation. The common element in these two cases was the element of defrauding the other person via the vehicle of the company. The company in fact was set up for absolutely no other purpose collateral to it. The main purpose was to defraud. Also, in Gencor v Dalby , a suggestive remark was provided that the corporate veil was being lifted where the organization was having an image exactly similar to that of the litigant. In reality however, as Lord Cooke (1997) has noted extrajudicially, it is a result of the different characters of the organization concerned and not regardless of it that value interceded in these cases. They are not occurrences of the corporate veil being pierced but rather include the utilization of different standards of law.

Reverse Piercing

There have been cases in which it is to the benefit of the shareholder to have the corporate structure overlooked. Courts have been hesitant to consent to this.  The often referred to case Macaura v Northern Assurance Co Ltd   is an example of that. Mr Macaura was the sole proprietor of an organization he had set up to develop timber. The trees were devastated by flame yet the back up plan wouldn’t pay since the strategy was with Macaura (not the organization) and he was not the proprietor of the trees. The House of Lords maintained that refusal was dependent on the different lawful character of the organization.

Criminal Law

In English criminal law, there have been cases in which the courts have been set up to pierce the veil of incorporation. For instance, in seizure procedures under the Proceeds of Crime Act 2002 monies gotten by an organization can, contingent on the specific facts of the case as found by the court, be viewed as having been ‘acquired’ by a person (who is for the most part, yet not generally, a chief of the organization). As a result, those monies may turn into a component in the person’s ‘advantage’ acquired from a criminal lead (and consequently subject to seizure from him). The position with respect to ‘piercing the veil’ in English criminal law was given in the Court of Appeal judgment on account of R v Seager in which the court said: 

There was no significant contradiction between directions on the lawful standards by reference to which a court is qualified for “pierce” or “rip” or “evacuate” the “corporate veil”. It is “hornbook” law that an appropriately framed and enrolled organization is a different legitimate element from the individuals who are its shareholders and it has rights and liabilities that are independent of its shareholders. A court can “pierce” the carapace of the corporate element and see what lies behind it just in specific conditions. It can’t do as such basically on the grounds that it thinks of it as may be simply to do as such. Every one of these conditions includes inappropriateness and deceitfulness. The court will at that point be qualified for search for the legitimate substance, not just simply the structure. With regards to criminal cases, the courts have recognized at any rate three circumstances when the corporate veil can be pierced. First, if an offender endeavours to shield behind a corporate façade, or veil to shroud his crime and his advantages from it. Secondly, where the transaction or business structures comprise a “gadget”, “shroud” or “hoax”, for example, an endeavour to mask the genuine idea of the transaction or structure to delude outsiders or the courts.

United States

In the United States, corporate veil piercing is the most contested issue in corporate law. Although courts are hesitant to hold a functioning shareholder at risk for activities that are legitimately the obligation of the organization, regardless of whether the partnership has a solitary shareholder, they will regularly do as such if the enterprise was particularly rebellious with corporate customs, to forestall misrepresentation, or to accomplish value in specific instances of undercapitalization.

To put it plainly, there is no strait-jacketed formula that exists here and the decision entirely depends on customary law points of reference. In the United States, various hypotheses, most significant “modify the sense of self” or “instrumentality rule”, endeavored to make a piercing standard. Generally, they rest upon three essential pillars—namely:

• Unity of Interest and Ownership: This is a situation in which the different personalities of the shareholder and organization stop to exist.
• Conduct which is Wrongful in Nature: In case the corporation takes steps which are deemed to be wrongful in nature.
• Proximate Cause:  If the company indulges in wrongful conduct, there must be some foreseeable ramifications that might be arising out of it, so the party which is actually seeking the piercing of the corporate veil must have suffered some harm arising out of the wrongful conduct of the corporation.

Despite all these guidelines laid out, the speculations neglected to explain a genuine methodology which courts could legitimately apply to their cases. Accordingly, courts battled with the confirmation of every circumstance and rather examine every given factor. This is known as “totality of circumstances”.

Another apparent question here is to decide the jurisdiction of a corporation if the business of the corporate entity is not limited to just one state. All enterprises have one place of business where they were initially set up and incorporated, (their “home” state) to which they are incorporated as a “household” company, and in the event that they work in different states, they would apply for power to work together in those different states as a “remote” organization. In deciding if the corporate veil might be pierced, the courts are required to utilize the laws of the company’s home state and not the numerous other states that they might be doing business in. 

This issue, at first sight, may not look like a big thing to worry about but sometimes it can be huge; for instance, Californian law is progressively liberal in enabling a corporate veil to be pierced, the standards that the Californian Corporate Law has set in terms of scenarios under which the Veil can be pierced are quite many in number and even if an organisation simply encroaches wrongdoing, the Courts might order for the Piercing of the Veil, while the laws of neighbouring Nevada are quite strict when it comes to piercing the veil. The law in Nevada may allow the veil to be pierced only under exceptional circumstances and thus it makes doing such things increasingly troublesome. 

Therefore, the owner(s) of an organization working in California would be liable to various potential for the company’s veil to be pierced if the enterprise was to be sued, contingent upon whether the partnership was a California residential partnership or a Nevada remote organization working in California. 

By and large, the offended party needs to demonstrate that the incorporation was only a formality and there was nothing more to it and that the enterprise dismissed corporate customs and conventions, for example, using the voting method to approve the daily decisions of the corporate entity. This is regularly the situation when an enterprise confronting lawful obligation moves its benefits and business to another company with a similar administration and shareholders. It likewise occurs with single individual enterprises that are overseen in a random way. All things considered, the veil can be pierced in both common cases and where administrative procedures are taken against a shell enterprise.

Factors for courts to consider

Variables that a court may think about when deciding whether or not to pierce the Corporate Veil include the things that are laid out below:

• Non-appearance/Absence or mistake of corporate records; 
• In case the members of the corporation are misrepresented or concealed; 
• Inability to look at  corporate conventions regarding conduct and documentation; 
• Mixing of advantages enjoyed by the enterprise and the shareholder; 
• Control of assets or liabilities to concentrate them; 
• Non-working corporate officials as well as chiefs; 
• Noteworthy undercapitalization of the business (capitalization necessities fluctuate depending on the industry, area, and specific conditions of the corporation which may vary from one company to the other); 
• Directing of corporate assets by the predominant shareholder(s); 
• Treatment by a person of the advantages of partnership as his/her own; 
• Was the enterprise being utilized as a “façade” for predominant shareholder(s) individual dealings like we have already seen in the article that some companies are set up only to defraud other persons or corporations and their incorporation serves absolutely no other purpose.

It is essential to take note that not all these elements should be met altogether for the court to pierce the corporate veil. Even if the corporation indulges in a few of the aforementioned bulleted provisions, it is well under the radar for getting its veil pierced. Further, a few courts may locate that one factor is so convincing in a specific case that it will discover the shareholders at risk. For instance, numerous enormous organizations don’t pay profits, with no recommendation of corporate inappropriateness, however, especially for a partnership firm which is small the inability to pay profits may propose monetary impropriety. 

Internal revenue service

Lately, the Internal Revenue Service (IRS) in the United States has utilized corporate veil-piercing contentions and rationale as a method for recovering salary, domain, or blessing tax revenue, especially from business entities which are incorporated for the sole reason of bequest arranging purposes. Various U.S. Tax Court cases including Family Limited Partnerships (FLPs) show the IRS’s utilization of veil-piercing arguments. Since proprietors of U.S. business substances made for resource security and home purposes frequently neglect to keep up legitimate corporate consistency, the IRS has accomplished various prominent court triumphs and victories.

Reverse piercing

Inverted veil piercing is the point at which the obligation of a shareholder is credited to the organization. All through the United States, the general guideline is that turn-around veil piercing isn’t allowed. However, the California Court of Appeals has permitted inverted veil piercing against a limited liability company (LLC) in view of the distinction in cures accessible to lenders with regards to joining resources of an account holders’ LLC when contrasted with connecting resources of an enterprise.

Whether fundamental rights can be claimed by the corporations

The two key issues at stake in the two significant Supreme Court cases involving the doctrine of the lifting of the corporate veil were whether corporations can assert their claim to fundamental rights and whether the corporate veil might be pierced in order to do so.

State Trading Corporation v. The Commercial Tax Officer (1963)

In this case , the State Trading Corporation, a government entity registered under the Indian Companies Act, requested relief from the States of Andhra Pradesh and Bihar by issuing a writ of certiorari or other appropriate writ or direction for quashing the order of the commercial tax officers of the states in question, assessing the corporation to sales tax and also for quashing. The respondents submitted a few preliminary objections questioning the maintainability of the petitions under Article 32 of the Indian Constitution when the Attorney General filed the case for the petitioners.

Two of those initial concerns were:

• Whether the State Trade Company, a business licenced to operate under The Companies Act of 1956 , qualified as a citizen under Article 19 and qualified to request the observance of fundamental rights, and
• Whether the State Trading Corporation was, despite the formality of incorporation under the Companies Act, in fact, a department and an organ of the Government of India, with the entirety of its capital contributed by the government, and whether it could assert that it had the authority to enforce fundamental rights under Part III of the Constitution against the state as defined in Article 12 of that Constitution.

Tata Engineering and Locomotive Company Ltd. v. State of Bihar (1965)

In the Tata Engineering and Locomotive Company Ltd. case (1965) , the petitioners were a company that had been registered under the Indian Companies Act, 1913, and that was engaged in the manufacturing of, among other things, diesel truck and bus chassis, as well as their spare parts and accessories, in Jamshedpur, Bihar. The business offers these items to dealers, state transportation agencies, and other companies operating in different states. Bombay served as the petitioners’ registered office. The petitioners have entered into dealership arrangements with various people to promote their trade around the nation.

In order to conduct business in various regions of India, the petitioners used the appropriate sections of the dealership agreements to sell their products to the dealers. As a result, the petitioners sell their automobiles to consumers, state transportation agencies, and dealers. The petitioners, in this case, argued that because their purchases were made in the course of interstate commerce, they were exempt from paying sales tax. 

On the other side, the sales tax officer argued that because the transactions had taken place within the boundaries of the State of Bihar and were, therefore, intra-state sales, they were subject to assessment under the Bihar Sales Tax Act, 1956 . The petitioners had been warned by the sales tax officer that if they failed to pay the sales tax, he would take the appropriate legal action. The majority of the company’s stockholders were and still are Indian nationals. In this case, the petitioners also cited Article 32. 

Concluding remarks for both cases

Hence, the 1965 case involved a privately owned firm, but the 1963 case included a government-owned one. Nonetheless, both of the companies were registered under the Indian Companies Act. In both instances, the court refused to pierce the corporate veil and acknowledged that the shareholders were the ones who had filed the Article 32 motion. This is due to the fact that it would actually imply that what businesses cannot accomplish directly, they may accomplish indirectly by depending on the notion of lifting the veil.

The Supreme Court declined to pierce the veil in the aforementioned cases not because it was thought to be against judicial principles but rather because, in their Lordships’ opinion, the veil could not be lifted in order to grant companies fundamental rights. Then, may it have been lifted in another way? No, not always. Nothing could have been a more practical, wise, and sinful way to raise the curtain if it had ever been lifted in order to provide companies with fundamental rights.

Development of the Concept of “Lifting of Corporate Veil”

Once a company is incorporated, it becomes a separate legal identity. An incorporated company, unlike a partnership firm which has no identity of its own, has a separate legal identity of its own which is independent of its shareholders and its members. 

The companies can thus own properties in their names, become signatories to contracts etc. According to Section 34(2) of the Companies Act, 2013 , upon the issue of the certificate of incorporation, the subscribers to the memorandum and other persons, who may from time to time be the members of the company, shall be a body corporate capable of exercising all the functions of an incorporated company having perpetual succession. Thus the company becomes a body corporate which is capable of immediately functioning as an incorporated individual.

The central focal point of Incorporation which overshadows all others is a distinct legal entity of the Corporate organisation. 

Solomon v Solomon

What the milestone case Solomon v Solomon lays down is that “in inquiries of property and limitations of acts done and rights procured or liabilities accepted along these lines… the characters of the common people who are the organization’s employees is to be disregarded”. 

Lee v Lee’s Air Farming Ltd

In Lee v Lee’s Air Farming Ltd ., Lee fused an organization which he was overseeing executive. In that limit he named himself as a pilot/head of the organization. While on the matter of the organization he was lost in a flying mishap. His widow asked for remuneration under the Workmen’s Compensation Act. At times, the court dismisses the status of an organization as a different lawful entity if the individuals from the organization attempt to exploit this status. The aims of the people behind the cover are totally uncovered. They are made to obligate for utilizing the organization as a vehicle for unfortunate purposes.

The King v. Portus Ex Parte Federated Clerk Union of Australia

In this case, Latham CJ while choosing whether or not workers of a company which was incorporated in the name of the Federal Government were not employed by the Federal Government decided that the company possesses a distinct identity from that of its shareholders. The shareholders are not at risk to banks for the obligations of the company. The shareholders don’t claim the property of the company.

Life insurance corporation of India v Escorts Ltd.

“It is neither fundamental nor alluring to count the classes of situations where lifting the veil is admissible, since that must essentially rely upon the significant statutory or different arrangements, an outcome which is tried to be achieved, the poor conduct, the element of public interest, the impact on parties who may be affected by the decision, and so forth.”

This was reiterated in this particular case. 

Circumstances under which the Corporate Veil can be Lifted

There are two circumstances under which the Corporate Veil can be lifted. They are:

1: Statutory Provisions

2: Judicial Interpretations

Statutory Provisions

Section 5 of the companies act, 2013.

This particular section characterizes the distinctive individual engaged in a wrongdoing or a conduct which is held to be wrong in practice, to be held at risk in regard to offenses as ‘official who is in default’. This section gives a rundown of officials who will be at risk to discipline or punishment under the articulation ‘official who is in default’ which includes within itself,  an overseeing executive or an entire time chief.

Section 45 of the Companies Act, 2013

Reduction of membership beneath statutory limit: This section lays down that if the individual count from an organization is found to be under seven on account of a public organization and under two on account of a private organization (given in Section 12) and the organization keeps on carrying on the business for over half a year, while the number is so diminished, each individual who knows this reality and is an individual from the organization is severally at risk for the obligations of the organization contracted during that time.

Madan lal v. Himatlal & Co.

In this case, the respondent documented a suit against a private limited company and its directors because he had to recover his dues. The directors opposed the suit on the ground that at no time did the company carried on business with individual count which was to go below the statutory minimum and in this manner, the directors couldn’t be made severely at risk for the obligation being referred to. It was held that it was for the respondent being dominus litus, to choose the people himself who he wanted to sue.

Section 147 of the Companies Act, 2013

Misdescription of name: Under sub-section (4) of this section, an official of an organization who signs any bill of trade, hundi, promissory note, check wherein the name of the organization isn’t referenced in the way that it should be according to statutory rules, such official can be held liable on the personal level to the holder of the bill of trade, hundi and so forth except if it is properly paid by the organization. Such case was seen on account of Hendon v. Adelman .

Section 239 of the Companies Act, 2013

Power of inspector to explore affairs of another company in the same gathering : It gives that in the event that it is important for the completion of the task of an inspector instructed to research the affairs of the company for the supposed wrong-doing, or a strategy which is to defraud its individuals, he may examine into the affairs of another related company in a similar group. 

Section 275 of the Companies Act, 2013

Subject to the provision of Section 278, this section provides that no individual can be a director of in excess of 15 companies at any given moment. Section 279 furnishes for a discipline with fine which may reach out to Rs. 50,000 in regard of every one of those companies after the initial twenty. 

Section 299 of the Companies Act, 2013

This Section emphasises and offers weightage to the existing proposal of the Company Law Committee: “It is important to see that the general notice which a director is bound to provide for the company of his interest for a specific company or firm under the stipulation to sub-section (1) of Section 91 which is ought to be given at a gathering of the directors or find a way to verify that it is raised and read at the following gathering of the Board after it is given.  The section not only applies to public companies but also applies to private companies. Inability to consent and act in consonance to the necessities of this Section will cause termination the Director and will likewise expose him to punishment under sub-section (4). 

Section 307 & 308 of the Companies Act, 2013

Section 307 applies to each director and each regarded director. The register of the shareholders should contain in it, not just the name but also how much shareholding, the description of shareholding and the nature and extent of the right of the shareholder over the shares or debentures.

Section 314 of the Companies Act, 2013

The object of this section is to restrict a director and anybody associated with him, holding any business which provides compensation if the company supports it.

Section 542 of the Companies Act, 2013

Pretentious Conduct: If over the span of the winding up of the company, it gives the idea that any business of the company has been continued with goal to defraud the creditors of the company or some other individual or for any deceitful reason, the people who were intentionally aware of this and still agreed to the carrying on of the business, in the way previously mentioned, will be liable on a personal level without incurring the liabilities of the company, and will be liable in a manner as the court may direct.

In Popular Bank Ltd , it was held that Section 542 seems to leave the Court with attentiveness to make an assertion of risk, in connection to ‘all or any of the obligations or liabilities of the company’.

Judicial interpretations and pronouncements

Instances are not few in which the courts have resisted the temptation to break through the Corporate Veil. But the theory cannot be pushed to unnatural limits. Circumstances must occur which compel the court to identify a company with its members. A company cannot, for example, be convicted of conspiring with its sole director. Other than statutory arrangements for lifting the corporate veil, courts additionally do lift the corporate veil to see the genuine situation. A few situations where the courts lifted the veil are laid down below as per the following case laws:

United States v. Milwaukee Refrigerator Transit Company

In this leading case law, the U.S. Supreme Court held that where a company is solely set up to defeat the statutory norms, justify the wrongdoings of the people of the company who use this corporate entity as a vehicle for the wrongdoing, where defrauding isn’t a collateral purpose of the company but the main purpose, the law will not see the company as a separate legal entity but will see it as an association of the members that it is made up of. 

Early examples where the English and Indian Courts neglected the guidelines built up by the landmark  Salomon’s ruling are:

Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd

In a great deal of cases, it ends up being important to check the character of an organization, to check whether it is a companion or a foe of the country the business is set up in. A milestone managing in this field was spread out in Daimler Co Ltd v Continental Tire and Rubber Co Ltd. The facts of the case are referenced below: 

An organization was set up in England and it was set up to sell tires which were thus made by a German organization in Germany. Most of the control in the British organization was held by the German organization. The holders of the rest of the shares with the exception of one, and every one of the chiefs were German, dwelling in Germany. In this way the genuine control of the English organization was in German hands. During the First World War, the English organization started an activity to recover an exchange obligation. What’s more, the inquiry was whether the organization had turned into an adversary organization and should, accordingly, be banned from keeping up the activity. 

The House of Lords laid out that an organization consolidated in the United Kingdom is a lawful entity. It’s anything but a characteristic individual with brain or inner voice. It can nor be anyone’s companion nor foe yet it might accept a foe character when people in ‘true’ control of its issues are inhabitants in any adversary nation or, any place the occupants are, are acting under the control of the foes. Just in case the activity had been permitted, the organization would have been utilized as a means by which the motivation behind offering cash to the foe would be practiced. 

That would be incredibly against open arrangement. But in case there was no such fear, the courts may decline to tear open the Corporate Veil.

People’s Pleasure Park Co v. Rohleder

In People’s Pleasure Park Co v Rohleder , certain terrains were moved by one individual to another interminably ordering the transferee from offering the said property to hued people. He moved the property to an organization made only out of Negroes. 

An activity was started for dissolution of this movement on the ground that every one of the individuals from the organization being Negroes, the property had, in break of the confinement, go to the hands of the hued people. The court rejected the contention and held that the individuals exclusively or all in all are not the partnership, which “has a particular presence separate from that of its investors.

Dinshaw Maneckjee Petit, Re.

The court has the ability to slight and infer the corporate substance in case that it is utilized for tax avoidance purposes or to go around expense commitment. An unmistakable and appropriate description of this situation is given in Dinshaw Maneckjee Petit, Re. The assessee was an affluent man getting a charge out of tremendous profit and intrigue pay. He shaped four privately owned businesses and concurred with each to hold a square of speculation as an operator for it. Pay was credited in the records of the organization yet the organization gave back the sum to him as an imagined advance. 

Further, he isolated his pay into four sections in an attempt to lessen his assessment obligation. It was held that the organization was shaped by the assessee absolutely and basically as a method for maintaining a strategic distance from super-charge and the organization was just the assessee himself. It did no business however was made essentially as a legitimate substance to apparently get the profits and interests and to hand them over to the assessee as imagined credits.

Government Companies

An organization may some time be viewed as an operator or trustee of its individuals or of another organization and may, accordingly, be esteemed to have lost its distinction for its head. In India, this inquiry has regularly emerged regarding Governmental organizations. Countless privately owned businesses for business purposes have been enrolled under the Companies Act with the president and a couple of different officials as the investors. 

The undeniable preferred position of framing an administration organization is that it gives the exercises of the State “a tad bit of the opportunity which was appreciated by private partnerships and the legislature got away from the standards which hampered activity when it was finished by an administration division rather than an administration enterprise. At the end of the day, it gave the administration portion of the robes of the person”. 

So as to guarantee this opportunity, the Supreme Court has repeated in various cases that an administration organization isn’t an office or an augmentation of the state. It’s anything but a specialist of the State. As need be, its representatives are not government workers and right writs can’t issue against it. In one of the cases, the court commented: 

“The organization being a non-statutory body and one consolidated under the Companies Act there was neither a statutory nor an open obligation forced on it by a resolution in regard of which requirement could be looked for by methods for the writ of Mandamus”.

The Madhya Pradesh High Court regarded a Government company to be a separate entity for the purpose of enabling a Development Authority to subject it to development tax. The assets of a Government company were held to be not exempt from payment of non-agricultural assessment under an AP legislation. The exemption enjoyed by the Central Government property from State taxation was not allowed to be claimed by a Government company. 

Gilford Motor Co v Horne.

The corporate entity is wholly incapable of being strained to an illegal or fraudulent purpose. The courts will refuse to uphold the separate existence of the company where the sole reason of it being formed is to defeat law or to avoid legal obligations. Some companies are just set up simply to defraud their customers or to act in a way which is against the statutory guidelines. This was clearly illustrated in the landmark ruling Gilford Motor Co v Horne . The case of the facts are laid out below:

The litigant was selected as an overseeing chief of the company of the plaintiff depending on the prerequisite condition that he will not, whenever he will hold the workplace of an organisation in which he will oversee the  executive work subsequently, open a business similar to the one which he was presently leaving or give the clients of the previous. His work was resolved under an understanding that is mentioned above. In the blink of an eye thereafter he started a business in the name of his wife the role of which was exactly what he had been prohibited to do according to the aforementioned contract. The new business was definitely a competing business and it was soliciting the customers of its previous business which was clearly a provision that was going against what he had agreed to before he left the job in the previous company.It was held that the organization was clearly based on conflicting terms that the defendant had agreed upon.

The respondent organization was an insignificant channel utilized by Horne to empower him, for his very own advantage, to acquire the upside of the clients of the offended party organization, and that the litigant organization should be limited just as Horne. 

Where an individual obtain cash from an organization and put it in offers of three distinct organizations in all of which he and his children were the main individuals, the loaning organization was allowed to join the advantages of such organizations as they were made uniquely to dupe the loaning organization.

Re, FG (Films) Ltd

In this case, the court would not propel the leading group of film censors to enlist a film as an English film, which was in truth created by a ground-breaking American film organization for the sake of an organization enrolled in England so as to dodge certain specialized troubles. The English organization was made with an apparent capital of just a mere 100 pounds, comprising of 100 shares of which 90 were held by the American president of the organization. The Court held that the real producer of the movie was the American organization and that it would be a sham to hold that the American organization and American president were simply operators of the English organization for delivering the film.

Jones v. Lipman

In this case, the merchant of a real estate property tried to dodge the particular execution of a contract for the clearance of the land by passing on the land to a company which he shaped for the reason and along these lines, he attempted to abstain from finishing the property deal of his home to the offended party. Russel J. depicting the company as a “devise and a hoax, a veil which he holds before his face and endeavors to stay away from acknowledgment by the eye of equity” and requested both the litigant and his company explicitly to fulfil the obligations of the contract to the offended party. 

Tata Engineering and Locomotive Co. Ltd. State of Bihar

In this case, it was expressed that a company is likewise not permitted to file a case in the name of fundamental rights by calling itself a collection of individuals who possess the fundamental rights.  When a company is framed, its business is the matter of an incorporated body therefore shaped and not of the people that it is composed of and the privileges of such body must be made a decision on that balance and can’t be made a decision on the supposition that they are the rights owing to the matter of the individual that are a part of the organisation.

N.B. Finance Ltd. v. Shital Prasad Jain

In this case, the High Court of Delhi allowed to the offended party organization a stay order which restrained the company of the defendant from alienating the properties that they owned on the ground that the defendant had borrowed money fraudulently from the plaintiff companies and the defendant had purchased properties in the name of the defendant companies. The court in this case did not award protection under the piercing of the corporate veil.

Shri Ambica Mills Ltd. v. State of Gujarat

Although the names of the petitioners of the case were not expressly mentioned, they were still held to be the parties to the proceedings. Also the managing directors couldn’t be said to be complete outsiders to the company petition although they in their individual limit might not be parties to such proceedings but in their official capacities, they are certainly capable of representing the company in such matters.

Approach of the Indian Courts in the 21st Century  

Subhra mukherjee v. bharat coking coal ltd..

In this situation , Hoax or façade is being talked about. A private coal company sold its real estate to the spouses of executives before nationalization of the company. Truth be told,archives were tweaked and back-dated to corroborate that the deal of the selling of the real estate to the wives of the directors was before nationalization of the company. Where such exchange is claimed to be a hoax and deceitful, the Court was supported in piercing the veil of incorporation to discover the genuine idea of the exchange as to realize who were the genuine parties to the deal and whether it was real and in good faith or whether it was between the married couples behind the façade of the different entity of the company.

Bajrang Prasad Jalan v. Mahabir Prasad Jalan

This case is about a Subsidiary Holding Company. The court, to consider an objection of mistreatment held that the corporate veil can be lifted in the instances of not simply of a holding company, but also its subsidiary when both are belonging to the parent organisation.

Singer India v. Chander Mohan Chadha

The idea of a corporate entity was advanced and endorsed to empower the trade,commerce and business scene and not to cheat the general population. In case where the court finds out that the corporate entity was not properly made use of, was set up only for illegal purposes, the court has every right to pierce the Veil and therefore see who actually was behind the Veil using the company as a vehicle for undesirable purposes.

Saurabh Exports v. Blaze Finance & Credits (P.) Ltd. 

Defendant no. 1 was a private limited company. Defendant no. 2 and 3 were the directors of that company. Defendant no. 4 was the husband of Defendant-3 and the sibling of Defendant -2. On the basis of alleged representation of Defendant-4 that Defendant-1 company was welcoming momentary deposits at great interest rates, the offended party deposited a sum of Rs. 15 lakhs in the company for a time of six months. At the point when the company neglected to pay the sum, the offended party sued it for the said sum alongside interest. Defendant-2 and Defendant-3 denied their risk on the grounds that they couldn’t have been made personally liable under any circumstance as the sum was deposited in the name of the company and not in the name of the directors of the company.

D-4 denied the risk on the ground that it had nothing to do with him as he was neither a director of the company nor a shareholder of the company so he had absolutely no role whatsoever in the case. It was held that Defendant-3 being a housewife had little task to carry out and hence couldn’t be made at risk. The offended party was looked to be put under the cloak of a corporate entity of Defendant-1 and, in this way, the corporate veil was lifted contemplating that Defendant-1 was just a family setting of the rest of the defendants. Defendant-2 was maintaining the business for the sake of the company. So Defendant-1 and Defendant-2 were both liable on a personal level.

Universal Pollution Control India (P.) Ltd. v. Regional Provident Fund Commissioner

This is an instance of ‘default in payment of the provident fund of the employee’’- Certain sum was expected and payable to the provident fund office by the sister concern of the company of the plaintiff, a demand was made by the defendant from the company of the petitioner on the ground that both the companies had two directors in common. It was held that the dispute raised by the respondent that the Court should lift the corporate veil and affix the obligation on the applicant was with no benefits and was unjustifiable. Both the companies were distinct legal entities under the provisions of the Companies Act and there was no arrangement under the Provident Fund Act that a risk of one organization can be secured on the other organization even by lifting the corporate veil, which is why this exercise would have been considered futile.

Richter Holding Ltd. v. The Assistant Director of Income Tax

Richter Holdings Ltd., a Cypriot company and West Globe Limited, a Mauritian company bought all shares of Finsider International Co. Ltd. (FICL), a U.K. company from Early Guard Ltd. another U.K. company. FICL held 51% shares of Sesa Goa Ltd. (SGL), an Indian company. The Tax Department issued a show cause notice to Petitioner claiming that the Petitioner had by implication obtained 51% in Sesa Goa Ltd and was, subsequently, obligated to deduct tax at source before making installment to Early Guard Limited. 

The Income Tax Department battled that according to Section 195 of the Act, the Petitioner is at risk to deduct tax at source in regard of installment made for the buy of the capital resource. The High Court of Karnataka held that the Petitioner should answer to the show-cause notice issued by the Tax department and urge every one of their disputes before it. The High Court additionally stressed that the reality of finding authority (Tax Department) may lift the corporate veil to investigate the genuine idea of the exchange to find out the fundamental actualities. 

The angle that merits more noteworthy consideration is that the Karnataka High Court shows a distinct fascination for lifting the corporate veil. This has various ramifications. Initially, the Richter Holding Case broadens significantly further the extent of the standards laid out in the Vodafone Case. For instance, in the Vodafone case, the Bombay High Court did not consider lifting the corporate veil to force taxation if there should arise an occurrence of transfers made by indirect measures.

Secondly, it isn’t obvious from the judgment itself whether the tax experts propelled the contention with respect to lifting the corporate veil. For the most part, courts concede to the sacredness of the corporate structure as a different legitimate personality and are moderate to lift the corporate veil, as proven by Adams v. Cape Industries , except if one of the built-up grounds exist.

Balwant Rai Saluja v. Air India Ltd. (2014)

A three-judge Supreme Court bench recently addressed a number of significant issues regarding whether, if ever, it is permissible to lift the corporate veil in its decision in Balwant Rai Saluja v. Air India Ltd. (2014). It is significant to take into account Lord Sumption’s recent ruling in the UK case of Prest v. Petrodel Resources Ltd. (2013) in this context. The Indian Supreme Court’s acknowledgement that the corporate veil should rarely be lifted is commendable, even though it does not support exactly the same standards as did Lord Sumption.

The Supreme Court properly notes that the six criteria outlined by Munby J. in Ben Hashem v. Ali Shayif (2008) have come to dominate the law on the issue, which was also approved by Lord Sumption in the Prest case . This is good news because it indicates that the Supreme Court is indirectly challenging the far broader justifications for lifting the veil in the past.

Using the “piercing the veil” doctrine, a court may overlook a company’s distinct legal identity and hold those who have actual control over it accountable. However, this principle has been and should be used sparingly, that is, only in situations where it is obvious that the firm was merely a camouflage or sham that the people in control of the said corporation purposefully formed in order to avoid liability.

The veil must be lifted sparingly by the courts, and the current facts would not be a suitable instance in which to do so. Therefore, only having ownership or control is insufficient to lift the veil of incorporation. It must be proven that Air India’s interference and improper behaviour deprived the appellants-workers in this case of their legal rights.

Whether arbitral tribunals have the power to lift the corporate veil

The issue of the arbitrator’s authority to lift the corporate veil has been addressed in a number of cases during the past few years by the Supreme Court, the High Courts of Bombay and Delhi, and other courts. In the absence of a ruling by the full or constitutional bench of the Supreme Court, the case law has been contradictory in how it has addressed the issue.

According to chronological order, the case of Indowind Energy Ltd. v. Wescare (I) Ltd. (2010) was the first to have briefly addressed the issue. The Court, in this case, recognised that Indowind, which was not a party to the arbitration agreement but was being forced to arbitrate by Wescare, did not act in a way that indicated its assent to engaging in the arbitration. The existence of a legitimate arbitration agreement between Subuthi and Wescare was not regarded as important. In this instance, the Court observed that the requirements for lifting the corporate veil had not been satisfied. It was emphasised that non-signatories could not be bound by an arbitration agreement, despite the fact that the ability of an arbitrator to lift the corporate veil was not addressed.

The judgement in Purple Medical Solutions (P) Ltd. v. MIV Therapeutics Inc. (2015) was the next case to explore how lifting the corporate veil intersects with the Company Act and the Arbitration Act . Neither one of the two respondents in the current case was a signatory to the arbitration agreement with the petitioner, but the petitioner nonetheless requested the appointment of an arbitrator on their behalf. The second respondent sought to be charged due to the fact that the first respondent simply served as the second’s corporate guise and carried out all transactions on the second’s behalf. The second respondent’s corporate veil was lifted by a single Supreme Court judge, who also chose an arbitrator on its behalf. It’s crucial to remember that the court lifted the corporate veil in this case and then appointed the arbitrator after doing the same. While this case clarifies the law about whether a court can remove the corporation’s veil during an arbitration procedure, it says nothing about an arbitrator’s ability to do the same.

By far, the most significant case addressing the issue at hand is Sudhir Gopi v. Indira Gandhi National Open University (2017) , and it merits a more thorough study. The judgement begins by stating that an arbitral tribunal is a creation of consent and that the parties’ agreement limits its jurisdiction. This restricted jurisdiction does not give it the authority to arbitrate on behalf of someone who hasn’t given their consent. With this limited justification, the Court came to the conclusion that the arbitral tribunal lacked the authority to lift the corporate veil. According to the ruling, the court may bind non-signatories to an agreement under specific conditions. It references the Chloro Controls ruling as it cites the two scenarios, implied consent and contempt for corporate personality, that were previously explored. This is done with the goal of highlighting the fact that courts have the authority to bind non-signatories when certain requirements are met. The case cites ONGC v. Jindal Drilling & Industries Ltd. (2015) as support for the finding that the arbitral tribunal’s authority is limited and that only a court, not an arbitral tribunal, has the authority to lift the corporate veil. Other cases include Great Pacific Navigation (Holdings) Corp. Ltd. v. M.V. Tongli Yantai (2011) and Balmer Lawrie v. Balmer Lawrie Workers’ Union (1985) . The Court then went on to draw comparisons between the facts of this case and several other cases on related issues before restating that the Arbitral Tribunal would not have the authority to lift the corporate veil.

A different Delhi High Court single-judge bench, however, reached a different conclusion and upheld the Sudhir Gopi decision as per incuriam. The High Court upheld relief in GMR Energy Ltd. v. Doosan Power Systems India (P) Ltd. (2017) by rejecting the argument that the Arbitral Tribunal has the authority to lift the corporate veil. It took note of the types of conflicts that were determined to be unresolvable by arbitration in A. Ayyasamy v. A. Paramasivam (2016) and pointed out that uncovering the corporate veil did not fit under any of the listed categories. The Court concluded its observation on this specific matter by noting that the Arbitral Tribunal and the court can both decide on the matter of alter ego.

In a recent judgement by the Delhi High Court, Delhi Airport Metro Express Private Limited v. Delhi Metro Rail Corporation Ltd. (2021) , the Delhi Metro Rail Corporation’s corporate veil was recently broken or lifted by the Hon’ble High Court in an intriguing ruling. The Union Ministry of Housing and Urban Affairs and the Government of the National Capital Territory of Delhi (Union Government and GNCTD, respectively) were found to be the two major shareholders in DMRC, and the Court determined that they are each responsible for paying off DMRC’s debt as a result of an arbitral award that was made against it. The DMRC needed to be able to discharge its liabilities that had developed after it received an arbitral decision, so the Hon’ble High Court of Delhi was petitioned to weigh in on whether the corporate veil-piercing theory needed to be used. The Hon’ble High Court of Delhi also decided whether relief might be requested in an execution procedure against a party who wasn’t a party to the original award or decree. The High Court then gave its opinion on the relevant situation, defending the necessity of applying the corporate veil principle in the absence of any allegations of deception, façade, or evasion of taxes or any other duties. According to the Court, the notion of piercing the corporate veil was not only appropriate in the aforementioned situations but could also be used when equity and the ends of justice were called for.

However, in the absence of a ruling by a full or constitutional bench of the Supreme Court, the legal position of the proposition is still up for debate. It is essential that the government take the initiative and publish guidelines or rules that make it clear that arbitrators have the required authority to decide on matters of company law.

It ought to be noticed that the rule of Salomon v. A. Salomon and Co. Ltd. is as yet the standard and the occasions of piercing the veil are the exemptions to this standard. The rule that a company has it’s very own different legitimate character of its own finds a significant spot in the Constitution of India too. Article 21 of the Constitution of India, says that: No individual will be denied of his life and individual freedom with the exception of as per the procedure set up by law. 

Under Article 21 a company likewise has the option to live and individual freedom as an individual. This was set down on account of Chiranjitlal Chaudhary v. Association of India where the Supreme Court held that fundamental rights ensured by the constitution are accessible not simply to singular natives but rather to corporate bodies also.

Along these lines, an organization can possess and sell properties, sue or be sued, or carry out a criminal offense in light of the fact that the partnership is comprised of and kept running by individuals, going about as operators of the company. It is under the ‘seal of the company’ that the individuals or shareholders submit misrepresentation.

It is conspicuously clear that incorporation of the company does not cut off personal liability at all times and in all circumstances. The sanctity of a separate corporate entity is upheld only in so far as the entity is consonant with the underlying policies which give it life. 

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Lifting the Corporate Veil

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