LIFTING THE CORPORATE VEIL

NATIONAL LAW SCHOOL OF INDIA UNIVERSITY

BANGALORE

A RESEARCH PROJECT ON LIFTING THE CORPORATE VEIL

(UNDER THE SUPERVISION OF………………………..)

A PROJECT FOR CORPORATE GOVERNANCE

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SUBMITTED TO : SUBMITTED BY

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 LIFTING THE CORPORATE VEIL

ACKNOWLEDGEMENT

With Profound Gratitude and sense of indebtedness I place on record my sincerest

thanks to Prof…………………………, for her invaluable guidance, sound advice
and affectionate attitude during the course of my studies. I have no hesitation in
saying that she moulded a raw clay into whatever I am through his incessant efforts
and keen interest shown throughout my academic pursuit. It is due to her patient
guidance that I have been able to complete the task.

I also express my regards to the Library staff for cooperating with me and making
available the books for this research.

Name:…………

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Table of Contents
RESEARCH METHODOLGY......................................................................................................................5
AIM AND OBJECTIVE:.........................................................................................................................5
STATAEMENT OF PROBLEM:..............................................................................................................5
SCOPE AND LIMITATION:...................................................................................................................5
HYPOTHESIS:......................................................................................................................................5
RESEARCH QUESTIONS:.....................................................................................................................5
1. What are the different theories of corporation?.......................................................................5
2. What are conditions under which the corporate veil can be pierce by the court?....................5
3. What are the judicial precedence regarding lifting of the corporate veil in Indian and
international context?.......................................................................................................................5
4. Whether there is need to re look at concept of lifting of corporate veil?..................................6
SOURCES:...........................................................................................................................................6
MODE OF CITATION:..........................................................................................................................6
INTRODUCTION.....................................................................................................................................7
Theories of Corporation:.......................................................................................................................8
a. Fiction Theory –.........................................................................................................................8
b. Realist Theory -..........................................................................................................................8
c. Bracket Theory-.........................................................................................................................8
d. Concession Theory-....................................................................................................................9
e. Purpose Theory-........................................................................................................................9
Concept of Separate Legal Personality:.................................................................................................9
Principle of Separate Legal Entity:.......................................................................................................10
Characteristic of a Body Corporate:.................................................................................................11
Doctrine of Piercing the Corporate Veil:..............................................................................................11
Evolution of the Concept of Corporate Veil :...................................................................................11
Meaning of Piercing the Corporate Veil:..........................................................................................12
Nature and Scope of the Doctrine:..................................................................................................12
Limited Liability v. Piercing the Corporate Veil:...............................................................................13
Circumstances in which Court may Pierce the Corporate Veil:............................................................13
Alter Ego:.........................................................................................................................................13
Enemy Character:............................................................................................................................14
Fraudulent conduct:........................................................................................................................14
Holding and Subsidiary company:....................................................................................................14

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Liability for Ultra-Vires Act:..............................................................................................................15

Facade or Sham or Cloak :...............................................................................................................15
Non Payment of Tax:.......................................................................................................................15
Piercing for Justice:..........................................................................................................................16
Piercing the Corporate Veil an Indian Experience...............................................................................16
Statutory Provisions in relation to the Lifting of Corporate Veil:.....................................................16
Section 45:.......................................................................................................................................16
Section 62 & 63:..............................................................................................................................17
Section 69(5):...................................................................................................................................17
Section 147:.....................................................................................................................................17
Section 212:.....................................................................................................................................17
Section 247:.....................................................................................................................................18
Judicial Pronouncement on Piercing the Corporate Veil:....................................................................18
Where the Court refused to lift the Veil of Corporation:.....................................................................19
Indian Context:................................................................................................................................19
International Context:.....................................................................................................................19
CONCLUSION.......................................................................................................................................20
Bibliography.........................................................................................................................................21
Article:.............................................................................................................................................21
Books:..............................................................................................................................................21
Web- sources:..................................................................................................................................21

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RESEARCH METHODOLGY

AIM AND OBJECTIVE:

The aim and objective of this paper is as under:

 To study, understand and analyse the historical and conceptual aspect of a Body
Corporate.
 To study, understand and analyse the feature of Separate Legal Personality.
 To study, understand and examine the situation where the veil can be lifted and the
abuse of the corporate personality can be casted out.

STATAEMENT OF PROBLEM:

To find the common law principle that the piercing of corporate veil is exceptional where the
Doctrine of Separate legal Personality is essential and to examine the basic stances and the
specific provision where the court can lift the veil.

SCOPE AND LIMITATION:

This paper is an overview of the subject of lifting the corporate veil in India and
such as it is not thorough study but a general study. However, researcher has made
an attempt to examine the need for lifting the corporate veil and judicial activism in
this regard, due to limited time, this paper may lack in depth study on some points.

HYPOTHESIS:

The researcher proceed with the hypothesis that the courts have been reluctant in piercing or
lifting the corporate veil due to prominence of separate legal entity theory in almost all the
jurisdictions.

RESEARCH QUESTIONS:

1. What are the different theories of corporation?

2. What are conditions under which the corporate veil can be pierce by the court?

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3. What are the judicial precedence regarding lifting of the corporate veil in Indian and
international context?

4. Whether there is need to re look at concept of lifting of corporate veil?

SOURCES:

The researcher has relied upon the primary and secondary resources of books,
reports, recommendations, journals, articles and web sources.

MODE OF CITATION:

A uniform method of citation is followed throughout this paper.

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INTRODUCTION

“The company is at law a different person altogether from the subscribers to the
Memorandum and, although it may be that after incorporation the business is precisely
the same as it was before, and the same persons are managers, and the same hands
receive the profits, the company is not in law the agent of the subscribers or the trustee
for them. Nor are subscribers as members liable, in any shape or form, except to the
extent and in the manner provided by the Act.”

-Lord McNaughten Saloman v. Saloman and Co.

Incorporation of a firm by registration was given in 1844 and the doctrine of limited liability
of a firm pursued in 1855. Later in 1897 in Salomon v. Salomon & Company 1 , the House of
Lords effected these enactments and cemented into English regulation the twin thoughts of
corporate entity and limited liability. In that case the apex Court laid down the principle that a
company is a distinct legal person entirely different from the members of that company. This
principle is referred to as the ‘veil of incorporation’.2

The theory of corporate entity is indeed the basic principle on which the whole law of
corporations is based. Instances are not few in which the Courts have successfully resisted the
temptation to break through the corporate veil.

In the eyes of law, a company is a legal person with a separate legal entity distinct from its
members or shareholders. It means that there is veil or curtain separating the legal entity of
the company from its members or shareholders. When any fraudulent and dishonest use is
made of the legal entity, the individual concerned will not be allowed to take shelter behind
the corporate personality. The court will break through the corporate shell and apply the
lifting or the piercing of the corporate veil. The court will make the members or the
controlling persons liable for debts and obligation of the company.

1
(1897) A.C 22 (H.L)
2
Anindita Ganguly, “Lifting Of The Corporate Veil” http://www.lawteacher.net/business-law/essays/article-on-
lifting-of-the-law-essays.php last accessed on 2nd August, 2013

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Theories of Corporation:

a. Fiction Theory –
This theory is expounded mainly by Savigny, Salmond, Coke, Blackstone and Holland.
According to this theory, a corporation is clothed with legal personality. The personality of a
corporation is different from that of its members. Savigny regarded corporation as an
exclusive creation of law having no existence apart from its individual members who form
the corporate group and whose who acts by fiction are attributed to the corporate entity. 3
Gray justifies fiction theory on the ground that the main object of incorporation is to protect
the interest of persons having common objectives. Like fictitious personality the will of the
corporation is also an imaginary creation of law.4
The fiction theory thus believes that incorporation is a fictitious extension of personality
resorted to for the purpose of facilitating dealings with property owned by a large body of
natural persons. The fiction theory however fails to answer satisfactorily the civil and
criminal liability of corporations.5

b. Realist Theory -
This theory is also known as the ‘Organic Theory’. The founder of this theory was a noted
German jurist Johannes Althusius, who believed that every collective group has a real mind, a
real will, and a real power of action. A corporation therefore, has a real existence, irrespective
of the fact whether it is recognised by the state or not. The corporate will of the corporation
finds expression through the acts of its directors, employees and agents. The existence of a
corporation is real and is not based on any fiction.
Dicey also contends that the personality of a group is a reflection of its consciousness and
will. Thus group personality is as real as the personality of an individual.6

c. Bracket Theory-
The Bracket theory is associated with the well known German jurist Ihring. According to
this theory juristic personality is only a symbol to facilitate the working of the corporate
bodies. Only the members of the corporation are ‘persons’ in real sense and the bracket is put
around them to indicate that they are to be treated as one single unit when they form
themselves into a bracket.

3
Savigny,System of Modern Roman Law (Translated by Ratingon). P 181
4
Gray: Nature and Sources of Law. P 55
5
Dr N.V Paranjape: Studies in Jurisprudence and Legal theory. P 358
6
Miraglia: Comparative Legal Philosophy. P 371

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d. Concession Theory-
The theory is basically linked with the philosophy of sovereign state. It pre- supposes that
corporation as a legal person has great importance because it is recognised by the State or the
law. According to this theory, juristic personality is a concession granted to corporations by
the State. It is entirely at the discretion of the State to recognise or not a juristic person.

e. Purpose Theory-
The main exponent of this theory was the noted German jurist Brinz, E.I Bekker, Alloys and
Demilius also support. The theory is founded on the view that corporations are treated as
‘persons’ for certain specific purposes. The assumption that only living persons can be
subject matter of rights and duties would have deprived imposition of rights and duties on
corporations which are non living entities. It therefore, became necessary to attribute
‘personality’ to corporation for the purpose of being capable of having rights and duties.

Concept of Separate Legal Personality:

Corporate Personality is the creation of law. Legal personality of corporation is recognised
both in English and Indian law. A corporation is an artificial person enjoying in law rights
and duties. A company is a “legal person” or “legal entity” separate from, and capable of
surviving beyond the lives of, its members. Like any juristic person, a company is legally an
entity apart from its members, capable of rights and duties of its own and endowed with the
potential of perpetual succession7.In other words, it has “legal personality” and is often
described as an artificial person in contrast with a human being, a natural person.8
The said principle was laid down in the case of Salomon v. Salomon9 where it was decided
that a corporate body has its own existence or personality separate and distinct from its
members and therefore, a shareholder cannot be held liable for the acts of the company even
though he holds virtually the entire share capital. The case also recognised the principle of
limited liability of a company.
In the words of Chief Justice Marshal – “A corporation is an artificial being invisible,
intangible existing only in the contemplation of law. Being a mere creation of law, it
possesses only the properties which the Charter of its creation confers upon it, either
expressly or as incidental to its very existence”.
7
Hahlo`s, CASEBOOK ON COMPANY LAW, 42(2nd Edn, Hahlo and Trebilock).
8
Gower and Davies, Principles of Modern Company Law, (8Th Edition, Sweet & Maxwell 2008) P 193
9
[1895-99]All ER Rep 33

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In India the legal status and position of a company has been well explained by the Supreme
Court of India in Tata Engineering & Locomotive Company Ltd v. State of Bihar 10, wherein it
observed “the corporation in law is equal to a natural person and has a legal entity of its
own”.

Principle of Separate Legal Entity:

Section 34 of the Companies Act, 1956 recognises the independent corporate existence
of a company as explained in and emphasised by House of Lords in the case of Salomon v.
Salomon & Co. Ltd. In that case Salomon a leather merchant and manufacturer of boots was
the owner of a business. He was solvent. He converted his business into a limited liability
company under the name and style of “Salomon & Company Limited”. Of the total share
capital he took 20,000 shares and his wife and five children took one share each. No other
share was issued. Salomon received mortgage debentures of £ 10,000 in part payment for the
purchase of his business by the company. The company was in financial difficulty due to
trade depression. The company went into liquidation, Salomon claimed preferential right
being the debenture holder over certain unsecured creditors of the company. The unsecured
creditors disputed his right to priority on the ground that the company was a “one man
company” and a sham. The trial judge held the company was a mere alias or agent for
Salomon and that Salomon was bound to pay the unsecured creditors. The Appeal Court
affirmed the decision. On further appeal, the House of Lords reversed the decision on the
ground that there was nothing in the Act as to the degree of interest which may be held by
each of the seven or as to the proportion or interest or influence possessed by one or majority
of the shareholders over the others. As a result, Salomon had a priority, being a debenture
holder, over other unsecured creditors. Salomon case established that (a) provided the
formalities of the Act are complied with, a company will be validly incorporated, even if it is
only a “one person” company and (b) the courts will be reluctant to treat a shareholder as
personally liable for the debts of the company by “piercing the corporate veil11”

Characteristic of a Body Corporate:

10
AIR 1965 SC 40
11
Supra Note.8 P 35.

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A number of other characteristics are also inherited by a Company on its incorporation; a

few are as under:
 Limited liability
 Perpetual Succession
 Separate property
 Transferability of Shares
 Contractual Rights:
 Capacity to Sue and be Sued

Doctrine of Piercing the Corporate Veil:

The doctrine of piercing or lifting of the veil of a Corporate Personality makes a change in
the attitude of law as originally adopted towards the concept of separate legal personality or
entity of the corporation. In Ansuman Singh v. State of U.P 12, the court held that in suitable
cases, the court will lift the corporate veil.

Evolution of the Concept of Corporate Veil :

Salomon`s case established beyond doubt that in law a registered company is an entity
distinct from its members, even if one person holds almost all the shares in the company.
Common lawyers have not engaged in much philosophical speculation about the nature of
corporate personality. Our law with its immensely fertile concept of trust and the well
developed doctrines of agency and vicarious liability has not needed to do more than treat the
corporation as far as possible as if it were a natural person. The law has developed according
to the needs and public policy of the day13. Whenever, in the view of the courts, justice
demands a different result from what would follow from a rigid application of the principle of
separate corporate existence of the company apart from its members and officers, they have
not hesitated to take a decision which seems fair enough even if it means lifting or piercing
the veil of corporation and having regard to the realities behind the facade of separate
corporate entity14. By their yardstick of public policy, the courts have determined, case by
case, whether and to what extent the rules relating to natural persons should be applicable to
artificial persons.

12
AIR 2004 All. 260
13
W.S Holsworth, History of English Law (3 rd Ed., 1944), Vol. lX, 70, and R.D Lumb, Corporate Personality
(1964) 4 U.Q.L.J. P 418
Reference should also be made to Gilford Motor Co Ltd v. Horne [1933] Ch. 935
14
L.C.B Gower, Modern Company Law (3rd Ed., Publisher 969), P 189 – 217

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Prof. Gower has observed that at the time of determination whether to lift the veil, the courts
ought to be guided by the policy of statute in question, and so the decision arrived at is likely
to vary from statute to statute. Nevertheless, it is difficult to avoid the conclusion that the
courts are committed to the preservation of separate legal entity of companies except where
the statutory wording clearly requires this. Therefore, the court refused to apply said doctrine
in Nokes v Doncaster Amalgamated Collieries and Lee v Lee’s Air Farming Ltd. cases taking
into consideration the relevant facts and the permissible limit doctrine of Separate Legal
Personality.

Meaning of Piercing the Corporate Veil:

The chief advantage of incorporation is Separate legal entities of the company from which all
other follow. The foregoing decisions manifest that there exists veil of incorporation between
the company and its members. This veil is opaque and impassable as a curtain, it is a partition
between the company and the members. Following this principle the courts used to refuse to
go behind this curtain and go behind the real person responsible. The doctrine of Piercing
the Corporate Veil means to lift that curtain and catch hold of the real person responsible
for the wrong committed. Piercing the corporate veil refers to the process whereby the
statutory guarantee of limited liability for shareholders is lifted and the “veil of the “corporate
fiction” of the corporation is “pierced” and the individual (or corporate shareholder) is
exposed to personal liability. Thus in cases where the corporate personality of the company is
used to commit frauds, improper or illegal acts, the corporate personality might have to be
removed to identify the persons who are really guilty, this is known as ‘piercing the corporate
veil’.

Nature and Scope of the Doctrine:

The veil of corporation is to be lifted in exceptional cases and in no way should it limit the
generality of the principle embodied in Salomon`s case. It is not possible to offer a principle
under which these cases can be subsumed.
The Karnataka High Court has observed in Cotton Corporation of India Ltd v. G.C
Odusumathd15 that the lifting of Corporate veil of a Company as rule is not permissible in law
unless otherwise provided in clear words of the statute or by very compelling reasons such as
where fraud is to be prevented or trading with enemy company is sought to be defeated.

15
[1999] 22 SCL 228 (Kar)

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Limited Liability v. Piercing the Corporate Veil:

Limited Liability Piercing the Corporate Veil

General Rule Exception to the Rule

Motive: encourage investment by Motive: to deter private interest under the

general public. cover of public interest.
Bestows right. Limits those rights.

Circumstances in which Court may Pierce the Corporate Veil:

Professor Gower and Davis has observed it is crucial to distinguish the situations where the
court is applying the terms of a statute (other than companies Act) or less often, a contract,
from those where, as a matter of common law, the veil is lifted.

Alter Ego:
Although Salomon made it clear that a company is not automatically the agent of its
shareholders, in exceptional cases such a relationship can exist, and it will be a question of
fact whether there is a relationship of agency in any particular case, so that it is appropriate to
pierce the veil. Questions of agency most often arise in the context of associated or group
companies, and so the two areas are here considered together. The principles leading to a
finding of agency were considered by Atkinson J in Smith, Stone & Knight Ltd v.
Birmingham Corporation16, in the context of whether a subsidiary company was the agent of
its holding company. That was a case where agency was established and the veil lifted.

16
[1939] 4 All ER 116

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Enemy Character:
The courts would lift the veil to ascertain the enemy character. The number of enemy
shareholders is essential in ascertaining the status.17 This condition is well explained in
Daimler Co Ltd. V. Continental Tyre & Rubber Co Ltd 18: C, a private company incorporated
in England had a capital of 25000 £1 shares. Shares were majorly held by a German
Company. House of Lords held that the company was an enemy company for the purpose of
trading with enemy legislation because its effective control was in enemy hands.

Fraudulent conduct:
Where it appears that any business of the company has been carried on with the intent to
defraud creditors of the company or any other person, or for any fraudulent purpose, those
who are knowingly parties to such conduct of business may, if the court thinks it proper to do
so, be made personally liable without any limitation as to liability for all or any debts or other
liabilities of the company. In Gilford Motors Company v. Horne19 the court refused to
acknowledge the ‘separate legal personality’ as the defendant formed a company only to
escape the contractual obligation.

Holding and Subsidiary company:

A company qualifies as a holding company when it has the power to control the composition
of the board of directors of another company or holds a majority of its shares it has been seen
that a subsidiary company, even a 100% subsidiary, is a separate legal entity and its creator
and controller is not to be held liable for its act. In Freewheels (India) Ltd. V. Veda
Mitra(Dr.)20A 52% subsidiary company proposed to issue further capital which , following
section 81 was offered to the existing holders of equity shares. The holding company
requested the court that its subsidiary should be restrained from going ahead with the issue as
it would deprive its parent of their controlling interest and would also depreciate the value of
its shares.
KAPUR J. Refused to issue the injection prayed for and said “here the parent holds only a
nominal majority in the share capital of the subsidiary. With the meagre majority alone I am
not prepared to hold, even if it were possible to do so for such a purpose. That the subsidiary
17
C.R Datta, Company Law, 583(6th Ed., 2008).
18
(1916)2A.C307. see also V/O Sovfracht v. Van Udens Scheepvaart [1943]1 All E.R.76 Where the ‘control’
test was applied and the remarks of Mc.Nair J. in Kuenigl v. Donnersmark(1955)1Q.B.515, where the learned
judge was of the opinion that a company might have enemy character and yet remain subject to the Crown under
the Companies Act.
19
[1933] 1 CH 935
20
AIR1969 DEL.258

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company has lost its identity as separate legal entity” 21.A holding company was not allowed
to interfere in the disinvestment decision of a subsidiary company even if one of the effects of
the disinvestment could have been the loss of position as a holding company22.
Even under Companies Act, 1956 Section 212 provides that every holding company shall
attach to its balance sheet, copies of the balance sheet and profit and loss account etc in
respect of each subsidiary company. It amounts to lifting the corporate veil because in the
eyes of law a subsidiary company is a separate legal person and through this mechanism their
identity is known.

Liability for Ultra-Vires Act:

Directors and other officers of the company will be personally liable for all those acts which
they have done on behalf of a company if the same are ultra vires the company.

In Weeks v. Propert23the directors of Railway Company which had fully exhausted its
borrowing powers advertised for money to be lent on the security of debentures. ‘W’ lent
£500 upon the faith of advertisement and received a debenture. Held, the debenture was void
but ‘W’ could sue the directors for breach of warranty of authority (since they had by
advertisement warranted that they had the power to borrow which in fact they did not have).

Facade or Sham or Cloak :

In Delhi Development Authority v. Skipper Construction Company Pvt. Ltd 24, the Supreme
court held that the fact that the director and members of his family had created several
corporate bodies did not prevent the court from treating all of them as one entity belonging to
and controlled by the director and his family if it was found that these corporate bodies were
mere cloaks and that the device of incorporation was really a ploy adopted for committing
illegalities and / or to defraud people.

Non Payment of Tax:

When any private company is wound up any tax assessed on the company whether before or
in course of liquidation, in respect of any previous year cannot be recovered, every person

21
State of U.P v. Renusagar Power Co.1989 Supp. (2)SCC312, where a subsidiary company was created for the
purpose of generating and supplying power only to its parent company and the two were treated as one for
excise purposes.
22
BDA Breweries v. Cruickshonk & Co.Ltd.(1996)85Comp.Cas.325 Bom.
23
(1873)L.R 8 C.P 427.
24
(1996) 4 SCALE 202 (SC)

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who was director of that company at any time during the relevant previous year shall be
jointly and severally be liable for payment of tax.
A company transferred its business to another company which was not taxable, but the
company was carrying on some other business which was taxable. The company remained
liable to pay the tax applicable to such business and lifting of Corporate Veil was permitted
even in the absence of any statutory provision in this regard.25

Piercing for Justice:

Although the interest of justice may provide the policy impetus for creating exceptions to the
doctrine of separate legal personality and limited liability, as an exception in itself it suffers
from the defect of being inheritably vague and providing to neither courts nor those engaged
in business any clear guidance as to when the normal company law rules should be displaced.
Consequently, it is difficult to find cases in which “the interest of justice” has represented
more than simply a way of referring to the grounds identified above in which the veil of
incorporation has been pierced.

Piercing the Corporate Veil an Indian Experience

Though the concept of ‘Separate Legal Personality’ was emanated from Salomon`s case26 ,
but it found its way in the Indian legal system long back in 1927 27 even before the current
Companies Act 1956, came into existence. Today the principle is well established in
company law.

Statutory Provisions in relation to the Lifting of Corporate Veil:

Notwithstanding the cardinal principles of “Limited Liability” and “Corporate Personality”,
the Companies Act 1956 has specifically provided that in certain cases the advantages of
distinct entity and limited liability may not be allowed to be enjoyed. Such cases are:

Section 45:
Where the number of members falls below the statutory minimum and the company carries
on business for more than six months while the number is so reduced, every person who is a
member of the company during the time the company so carries on business after those six

25
India Waste Energy Development Ltd v. Government NCT of Delhi (2003) 114 Comp Cases 82 (Del).
26
Supra Note. 9
27
Mc Dowell & Co. Ltd v. CTO AIR 1986 SC 649.

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months and is aware of that fact shall be severely liable for the payment of company`s debts
contracted during that time.

Section 62 & 63:

In case of misrepresentation in a prospectus, every director, promoter and every other
person, who authorises such issue of prospectus incurs liability towards those who subscribed
for shares on the faith of untrue statement.

Section 69(5):
In case of first allotment of shares in a Public company if minimum subscription has not
been received within 120 days of issue of prospectus, the directors shall be personally liable
to pay money with interest, if application money is not repaid within the next 10 days of
closure of the issue.

Section 147:
Where an officer of a company signs on behalf of the company any contract, bill of exchange,
promissory note, cheque or order for money, such person shall be personally liable to the
holder of the name of the company is either not mentioned, or is not properly mentioned.
Thus, where on a cheque, the name of a company was stated as ‘LR agencies Ltd’ whereas
the real name of the company was ‘L&R Agencies Ltd’. The signatories’ directors were held
personally liable.28

Section 212:
A holding company is required to disclose to its members the accounts of its subsidiaries.
Under this section it is provided that every holding company shall attach to its balance sheet,
copies of the balance sheet, profit and loss account, directors report and auditors’ report etc in
respect of each subsidiary company. It amounts to lifting the corporate veil because in the
eyes of law a subsidiary is a separate legal person and through this mechanism their identity
is known.

28
Hendon v. Adelman 1973 New Delhi LR 637.

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Section 247:
The Central Government may appoint one or more inspectors to investigate and report on the
membership of any company for the purpose of determining the true persons who are
financially interested in the company and who control its policy or materially influence it.

Judicial Pronouncement on Piercing the Corporate Veil:

Ever since the concept of ‘Separate legal Personality’ and ‘Limited Liability was laid down in
the famous judgment of Salomon v. Salomon 29, the courts have been reluctant to pierce the
corporate veil and hold the members of the company liable. Nevertheless the courts in a
number of cases have considered it necessary to ignore the separate legal entity of a
company. A few such cases are discussed below:
In Dinshaw Manakjee Petit30 , the assessee who was a very rich man, enjoyed large dividend
and interest income. He formed four private companies and agreed with each to hold a block
of investment as an agent for it. The income received was credited in the accounts of the
company but the company handed back the amount to him as a pretended loan. This way he
divided his income in four parts in order to reduce his tax liability. It was held that ‘the
company was formed by the assessee purely and simply as a means of avoiding super- tax
and the company was nothing more than the assessee himself, it did no business...’. The
Court decided to disregard the corporate entity as it was used for tax evasion.
Avoidance of Welfare legislation is as common as avoidance of taxation and the approach in
considering problems arising out of such avoidance has necessarily to be the same and
therefore, where it was found that the sole purpose for the formation of the new company was
to use it as a device to reduce the amount to be paid by way of bonus to workmen the
Supreme Court in The Workmen Employed in Associated Rubber Industries Ltd, Bhavnagar
v. The Associated Rubber Industries Ltd, Bhavnagar and another 31 upheld the piercing of the
veil to look at the real transaction.
In Calcutta Chromotype Ltd. v. Collector of Central Excise, Calcutta32 : the Court held that
there is no bar on the authorities to lift the veil of a company, whether a manufacturer or a
buyer, to see it as not wearing that mask, or not being treated as related person, when, both,

29
Supra Note 9.
30
AIR 1927 Bom. 371
31
AIR 1986 SC 1.
32
1998(99)ELT202(SC)

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the manufacturer and the buyer, are in fact the same persons. It held that tax planning may be
legitimate provided it is within the framework of law but colourable devices cannot be part of
tax planning. Dubious methods resorting to artifice or subterfuge to avoid payment of taxes
on what really is income can today no longer be applauded and legitimised as a splendid
work by a wise man but has to be condemned and punished with severest of penalties and for
that purpose if a person is found to indulge therein the lifting of veil would also be justified.

Where the Court refused to lift the Veil of Corporation:

The theory of corporate entity is still the basic principle on which the whole law of
corporations is based.

Indian Context:
The shareholders cannot ask for lifting the veil for their purposes: This was upheld in
Premlata Bhatia v. UOI33 wherein the premises of a shop were allotted on a license to the
individual. She set up a wholly owned private company and transferred the premises to that
company with the consent of the Government. She could not remove the illegality by saying
that she and her company were virtually the same person.
Holding Company`s Subsidiary with Substantial Interest: The question of piercing the veil
was held irrelevant where the holding company`s subsidiary had a substantial interest,
particularly when it had not accepted any such liability.34

International Context:
Where the justice of the case does not warrant the lifting the corporate veil, the courts have
shown a reluctance to do so, irrespective of the degree of control exerted over the company
by a third party.35
There is one well recognized exception to the rule prohibiting the piercing of the ‘corporate
veil’. This exception today is generally expressed as permitting disregard of the company
when the corporate structure is a “mere façade concealing the true facts” – “façade” or

33
(2004) 58 CL 217 (Delhi)
34
SAE (India) Ltd v. EID Parry (India) Ltd (1998) 18 SCL 481(Mad.)
35
Berna Collier Common Law Principles applicable to lifting- The Corporate veil Malaysia and Singapore, (1998) Canta LR

at 58.

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“sham” having replaced an assortment of epithets 36 which judges have employed in earlier
cases. The difficulty is to know what precisely may make a company a “mere façade”.
In general the court felt that it was “left with rather sparse guidance as to the principles which
should guide the court in determining whether or not the arrangement of the corporate group
involve a façade….” but, unfortunately, it declined to “attempt a comprehensive definition of
those principles”.

CONCLUSION

The general principle with respect to the status of corporate entities is that a corporation is
independent having separate corporate identity separate from their individual members or
other corporations. Therefore the acts of directors, shareholders etc will not be liable of any
debts or liabilities of any of the corporate acts or obligations of its corporation or subsidiary.
However in many instances this corporate privilege is used as means to exploit lacuna in the
law to evade oneself from liability. Therefore in the interest of justice, the court may pierce or
lift the corporate veil can make officials or members of the corporation liable for the
misconduct under the name of the corporation.

The incorporation does not cut off personal liability at all times and in all circumstances and
those who enjoy the benefits of the machinery of incorporation have to assure capital
structure adequate to the size of the enterprise.

The act of piercing of corporate veil is still not clear in corporate law. As in cases of fraud,
sham or facade and group enterprise, the courts have lifted the corporate veil but these are
only guidelines given by superior courts and are not exhaustive and it depends from the facts
of the case that whether the court should in the interest of justice exercise its jurisdiction in
piercing the corporate veil or not.

36
Bugle Press, Re [1961] Ch. 270 at 288, CA.

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Bibliography

Article:

1. Helen Anderson, Piercing the Veil of Corporate Groups in Australia: The case for
Reform 33 Melbourne University Law Review 333(2009).

Books:

1. Gower and Davies, Principles of Modern Company Law, (Sweet & Maxwell 8 Th Ed.
2008.)
2. Avtar Singh, Company Law, (Eastern Book Company`s 14th Ed. 2005).
3. C.R Datta, Company Law, (Lexis-Nexis, Butterworths, Wadhwa, Nagpur 6th Ed.
2008).
4. J.F Northey, Introduction to Company Law, (Butterworths 8th Ed. 1980).
5. Paul L. Davies, Principles of Company Law, (Sweet & Maxwell 8th Ed. 2008).
6. A Ramaiya, Guides to the Companies Act, (17th Ed. Lexis-Nexis, Butterworths,
Wadhwa, Nagpur. 2010)

Web- sources:

1. www.manupatra.com
2. www.westlaw.com
3. www.indlaw.com
4. www.lexisnexis.com
5. www.legalserviceindia.com
6. www.corporatelaw.com
7. www.scconline.com
8. www.heinonline.com
9. www.jstor.org

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