6.

3 LIFTING THE CORPORATE VEIL

The doctrine of the lifting the veil of corporate personality is a doctrine that advocates
going behind and looking behind the juristic or corporate personality of a body
corporate. Undoubtedly, as a general rule, a company is a person distinct and
separate from its members. But, in exceptional cases, that veil of corporate
personality can be lifted; and looking behind the veil, one could see the corporate
personality fading away. Law courts have, in exceptional cases, cracked the shell of
corporate personality and have looked upon a corporation and its members from a
different point of view.

Courts have lifted the veil, with the objective of preventing fraud. In such cases the
members of the corporation are considered as persons working for the corporation.
In Tata Engineering & Loco-motive Co. Ltd. V State of Bihar 1, although the veil was
not lifted, however the doctrine of lifting the veil of the corporation was considered at
great length.

The law is complicated by the facts that the courts do not always take account of the
distinct personality of a company. It renders impossible to any consistent theory as to
the nature of personality and emphasizes more strongly than anything else the need
to proceed empirically in understanding the law. The courts do in some cases pierce
(lift) the veil of legal personality in order to detect and redress frauds upon creditors;
the evasion of obligations or statutes or to suppress tax evasion.

6.4 POSITION IN ENGLAND

In England, the problem was faced soon after War. The court may lift the veil of
personality for a number of reasons- Firstly- it may be done to ascertain whether a
company is to be treated as an „Enemy Company‟ in times of War. Thus during the
First World War in Dalmer Co. Ltd. V Continental Tyre & Rubber Co. ( Great Britain)
Ltd.2, a company which was registered in England and which should normally be
treated as an English Company was nevertheless held by the House of Lords to be
an enemy company because, all its directors and its shareholders except one were

1
2
Fitzerald P.J.; Salmond on Jurisprudence 1988 (12th Ed.) page 299
Germans. This is, however, not a departure from the general rule that a company
is distinct from its members, it only shows that its character whether friendly or
enemy is to be ascertained by looking behind the veil.

A different view has been expressed in case of Kuemgel V Donnersmarch 3, where it

was held that a company which acquires enemy character in this way still remains
An English Company, if it had been registered in England. Secondly, public policy
may make it necessary to lift the veil of a legal personality to look at the realities of a
situation. Thirdly, it may become necessary to disregard corporate personality in
order to prevent fraud.

6.5 DOCTRINE OF CONSTRUCTIVE NOTICE OR KNOWLEDGE EVOLVED BY

COURTS IN U.K.

In regard to company transactions, the doctrine of constructive notice was evolved

by the Courts in UK for the protection of the company against third parties dealing
with the company, in that they are presumed to have the knowledge of the
company‟s public documents, that is the documents filed by the company and kept
together with the facts recorded in the relevant register by the Registrar, which are
open to public for inspection with the right to have certified copies of , extracts from
them as needed by them from the registrar (which is also provided under section 610
of the our Companies Act 1956), irrespective of whether the third parties have the
knowledge of the same fact or not. According to section 610 these documents and
registers are kept in accordance with the rules under the Destruction of Records Act,
1917.4

The documents filed by companies are final, once those are taken on record by the
Registrar, endorsement subject to the companies being free to file revised
documents to rectify any error or mistake in the documents, earlier filed as permitted
by regulations 17 of the companies Regulations 1956, with the reasons, which the
registrar is bound to take on record, that is both the documents exist on file. The
Registrar has no power to de-register any documents already registered by him,
however the requirement for the Registrar to publish public notices in the official

3
4
Gazette in respect of alterations to the memorandum and articles of association of
companies provided for in the English Act, is not present in our Act, except in case of
publication of the resolution for voluntary winding up under section 485 by the
company, and the notice for striking the name of the company off the register under
section 560 of the Act by the Registrar. In the result, it is for the outsider who intend
to deal with the company to be informed of the contents of such documents available
for inspection at the Registrar‟s office as well as statutory records available for
inspection at the registered office of the company in their own interest, and even if
they do not do so they are deemed in law to have done so and have the knowledge
of contents, and they will not be heard to say that they did not do so. 5

6.6 FEATURES

The special features of this doctrine is that every person dealing with the company is
presumed to have notice of all the documents filed with the registrar of companies,
which further mean that every person dealing with the company has read these
documents and understood them in their true perspective. Hence if any party dealing
with the company does not have actual notice of the contents of these documents, it
is presumed that he has an implied (constructive) notice of them. Consequently, if a
person enters into a contract which is beyond the powers of the company, as defined
in the memorandum, or outside the limit set on the authority of the directors as per
the memorandum or articles, he cannot, as a general rule, acquire any rights under
the contract against the company.

In one of the Madras case that of Kotla Venkataswamy V Chinta Ramamurthy 6 , the
articles of association of the company required that all documents should be signed
by the managing director, secretary and the working director on behalf of the
company.

A deed of mortgage was executed by the secretary and the working director only.
The court held that no claim would lie under such deed. The learned judge observed
that the mortgagee should have consulted the articles before the deed was
executed. Therefore, even though the mortgagee may have acted in good faith and

5
P.N. Mullick V P.K. Mullick 1925 LR 52; Ind App 245 Cited From Prof. Aggrawal Nomita‟s
Jurisprudence 8th Ed.2010 Page 169
6
the money borrowed applied for the purpose of the company, the mortgage was
nevertheless invalid.

Thus, persons dealing with a body corporate, incorporated company or a society are
bound to take notice of disabilities imposed on the body corporate and its officials by
the memorandum and articles or other documents of constitution. 7

 DOCTRINE OF CONSTRUCTIVE NOTICE SUBJECT TO FOLLOWING

DOCTRINES
 DOCTRINE OF INDOOR MANAGEMENT
 DOCTRINE OF HOLDING OUT
 DOCTRINE OF INDOOR MANAGEMENT:-

6.7 DOCTRINE OF CONSTRUCTIVE NOTICE

Doctrine of constructive notice is subject to the doctrine of indoor management.

According to the doctrine of indoor management, an outsider dealing with the
company is required to see that the authority of dealing had been given by the
articles to the person with whom the outsider is dealing but he cannot be assumed to
do any more: he is not expected to enquire whether the proper procedure has been
followed for the delegation of the authority to the person with whom the outsider is
dealing.8, he may be presumed to have the knowledge of the constitution of the
company but not what may or may not have taken place within the indoors which are
closed to him.

The doctrine entitles the outsiders dealing with the company to assume that the
things have been done in accordance with the provisions and proceedings stated in
the articles of association of the company. Thus every outsider is entitled to assume
the regularity of internal proceedings unless he has the knowledge of the irregularity.

7
8
Fitzerald P.J.; Salmond on Jurisprudence 1988 (12th Ed.) page 299
The doctrines implies responsibility on the person in-charge on the management of
the company to see that all the rules of internal management of a company are
complied with and the company will be liable to the outsider for the acts of its
directors or agents even if the internal formalities or internal procedures have not
been complied with. An example will make the point more clear. If the articles give
power to the managing agent of the company to borrow money with the approval of
directors but the managing agent borrows without such approval, the lender will not
be effected by such irregularity; he may presume that before borrowing, the
management agent has taken approval of directors and consequently, the company
will be bound by the loan. However, if the lender has the knowledge of the
irregularity, the position would be quite different. The lender will not be protected and
consequently the loan will not be binding on the company. 9

The object of this doctrine is to protect the outsider with a company. The doctrine is
based on the business convenience, for business could not be carried on if every
body dealing with the apparent agents of a company was compelled to call for
evidence that all internal regulations had been duly observed. Since memorandum
and articles of association of the company are public documents which are open to
the public inspection, an outsider is presumed to have the knowledge of their
contents but the details of internal procedure are not open to public inspection and
therefore it would be unfair if an outsider dealing with the company is presumed to
have the knowledge of the details of internal procedure (the rule of internal
management.)10

The doctrine was first developed in the case of Royal British Bank V Turquand. The
doctrine of indoor management is also known as rule in Turquand’s case. In this
case the directors were empowered by its registered deed of settlement 11 to borrow
on bond such sums as should be authorized by a general resolution passed at a
general meeting of the company. The company borrowed money and issued a bond
signed by two directors under the seal of the company. When the lender sued on the
bond, the company contended that there had been no resolution authorizing the loan
and therefore the bond was given without authority and consequently it was not
binding on the company.
9
Dr. Paranjape N.V. on Studies in Jurisprudence, legal theory 4rth Ed.(Reprint 2006) Page 314
10
11
The court rejected the contention of the company and held that borrowing might be
authorized by a resolution of the company, the plaintiff (the lender) had right to
assume that the necessary resolution had been passed. The doctrine of indoor
management developed in the above case is based on reason and justice. It has
been applied by the courts in a number of cases to secure justice. However, there
are few exceptions to the doctrine of indoor management.

6.8 EXCEPTIONS

 Notice of irregularity
 Suspicious circumstances inviting inquiry
 Forgery
 No knowledge of contents of articles

6.9 DOCTRINE OF HOLDING OUT-

The Doctrine of constructive notice is also subject to the doctrine of holding out.
Hence the doctrine of holding out creates an exception to the doctrine of constructive
notice. If a person is held out by the company as its officer, the act of the person
falling within the actual or ostensible authority of the officer will be binding on the
company. For example, Mr. A is held out by the company as its managing director,
while in reality he has not been appointed to the office of managing director. The act
of Mr. A will be binding on the company, provided it falls within the actual or
ostensible authority of the managing director.12

Thus, if the company represents that a person is an officer and the act of the officer
will be binding on the company. The doctrine of holding out is based on the doctrine
of estoppels which say that a person cannot be allowed to deny the truth of his
statement. In the above referred case of Freeman & Lockyer 13, The court has held
that a contractor can hold the company liable for a contract made on its behalf on the
ground of holding out if the following are proved:- That a presentation that the agent
12
P.N. Mullick V P.K. Mullick 1925 LR 52; Ind App 245 Cited From Prof. Aggrawal Nomita‟s
Jurisprudence 8th Ed.2010 Page 169
13
P.N. Mullick V P.K. Mullick 1925 LR 52; Ind App 245 Cited From Prof. Aggrawal Nomita‟s
Jurisprudence 8th Ed.2010 Page 169
or the officer had authority to enter, on behalf of the company, into a contract of the
kind sought to be enforced was made to the contractor. That such representation
was made by a person or persons who had actual authority to manage the business
of the company either generally or in respect of those matters to which the contracts
relates. That the contractor was included by such representation to enter in to
contract, that is, that he in fact relied upon it; and