INTRODUCTION

Before dealing with the lifting of corporate veil it is pertinent to define what the meaning of a
company is. Strictly, a company has no particular definition but section 3(1) (i) of the Companies
Act attempts to provide the meaning of the word in context of the provisions and for the use of
this act. It states: ‘a company means a company formed and registered under this Act or an
existing company as defined in section 3 (1) (ii).’ The company must be registered under the
Companies Act for it to become an incorporated association. If it is not registered it becomes an
illegal association. This paper would deal with the lifting of corporate veil and its aspects with
the judicial decisions. Let us first discuss the exact meaning of corporate veil and lifting of
corporate veil with limited liability concept.

Corporate veil:
A legal concept that separates the personality of a corporation from the personalities of its
shareholders, and protects them from being personally liable for the company’s debts and other
obligations.

Lifting of Corporate veil:

At times it may happen that the corporate personality of the company is used to commit frauds
and improper or illegal acts. Since an artificial person is not capable of doing anything illegal or
fraudulent, the façade of corporate personality might have to be removed to identify the persons
who are really guilty. This is known as ‘lifting of corporate veil’.

It refers to the situation where a shareholder is held liable for its corporation’s debts despite the
rule of limited liability and/of separate personality. The veil doctrine is invoked when
shareholders blur the distinction between the corporation and the shareholders. A company or
corporation can only act through human agents that compose it. As a result, there are two main
ways through which a company becomes liable in company or corporate law: firstly through
direct liability (for direct infringement) and secondly through secondary liability (for acts of its
human agents acting in the course of their employment).

There are two existing theories for the lifting of the corporate veil. The first is the “alter-ego” or
other self theory, and the other is the “instrumentality” theory.

The alter-ego theory considers if there is in distinctive nature of the boundaries between the
corporation and its shareholders.

The instrumentality theory on the other hand examines the use of a corporation by its owners in
ways that benefit the owner rather than the corporation. It is up to the court to decide on which
theory to apply or make a combination of the two doctrines.

Concept of limited liability:

One of the main motives for forming a corporation or company is the limited liability that it
offers to its shareholders. By this doctrine, a shareholder can only lose what he or she has
contributed as shares to the corporate entity and nothing more. This concept is in serious conflict
with the doctrine of lifting the veil as both these do not co-exist which is discussed by us in the
paper in detail.

DEVELOPMENT OF THE CONCEPT

OF “LIFTING THE CORPORATE VEIL”
One of the main characteristic features of a company is that the company is a separate legal
entity distinct from its members. The most illustrative case in this regard is the case decided by
House of Lords- Salomon v. A Salomon & Co. Ltd[i].

In this case, Mr. Solomon had the business of shoe and boots manufacture. ‘A Salomon & Co.
Ltd.’ was incorporated by Solomon with seven subscribers-Himself, his wife, a daughter and
four sons. All shareholders held shares of UK pound 1 each. The company purchased the
business of Salomon for 39000 pounds, the purchase consideration was paid in terms of 10000
pounds debentures conferring charge on the company’s assets, 20000 pounds in fully paid 1
pound share each and the balance in cash.

The company in less than one year ran into difficulties and liquidation proceedings commenced.
The assets of the company were not even sufficient to discharge the debentures (held entirely by
Salomon itself) and nothing was left to the insured creditors. The House of Lords unanimously
held that the company had been validly constituted, since the Act only required seven members
holding at least one share each and that Salomon is separate from Salomon & Co. Ltd.

The entity of the corporation is entirely separate from that of its shareholders; it bears its own
name and has a seal of its own; its assets are distinct and separate from those of its members; it
can sue and be sued exclusively for its purpose; liability of the members are limited to the capital
invested by them.[ii]

Further in Lee v. Lee’s Air Farming Ltd.[iii], it was held that there was a valid contract of
service between Lee and the Company, and Lee was therefore a worker within the meaning of
the Act. It was a logical consequence of the decision in Salomon’s case that one person may
function in the dual capacity both as director and employee of the same company.

In The King v Portus; ex parte Federated Clerks Union of Australia[iv], where Latham CJ
while deciding whether or not employees of a company owned by the Federal Government were
not employed by the Federal Government ruled that the company is a distinct person from its
shareholders. The shareholders are not liable to creditors for the debts of the company. The
shareholders do not own the property of the company.
In course of time, the doctrine that a company has a separate and legal 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.

Thus when “Tata Company” or “German Company” or “Government Company” is referred to,
we look behind the smoke-screen of the company and find the individual who can be identified
with the company. This phenomenon which is applied by the courts and which is also provided
now in many statutes is called “lifting of the corporate veil”. As a consequence of the lifting of
the corporate veil, the company as a separate legal entity is disregarded and the people behind
the act are identified irrespective of the personality of the company. So, this principle is also
called “disregarding the corporate entity”.

LIFTING THE CORPORATE VEIL

Meaning of the doctrine:
Lifting the corporate refers to the possibility of looking behind the company’s framework (or
behind the company’s separate personality) to make the members liable, as an exception to the
rule that they are normally shielded by the corporate shell (i.e. they are normally not liable to
outsiders at all either as principles or as agents or in any other guise, and are already normally
liable to pay the company what they agreed to pay by way of share purchase price or guarantee,
nothing more).[v]

When the true legal position of a company and the circumstances under which its entity as a
corporate body will be ignored and the corporate veil is lifted, the individual shareholder may be
treated as liable for its acts.

The corporate veil may be lifted where the statute itself contemplates lifting the veil or fraud or
improper conduct is intended to be prevented.

“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.”. This was iterated by the Supreme Court
in Life Insurance Corporation of India v. Escorts Ltd.[vi]

The circumstances under which corporate veil may be lifted can be categorized broadly into two
following heads:

1. Statutory Provisions
2. Judicial interpretation

STATUTORY PROVISIONS
Section 5 of the Companies Act defines the individual person committing a wrong or an illegal
act to be held liable in respect of offenses as ‘officer who is in default’. This section gives a list
of officers who shall be liable to punishment or penalty under the expression ‘officer who is in
default’ which includes a managing director or a whole-time director.

Section 45– Reduction of membership below statutory minimum: This section provides that if
the members of a company is reduced below seven in the case of a public company and below
two in the case of a private company (given in Section 12) and the company continues to carry
on the business for more than six 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.

In the case of Madan lal v. Himatlal & Co.[vii] the respondent filed suit against a private limited
company and its directors for recovery of dues. The directors resisted the suit on the ground that
at no point of time the company did carry on business with members below the legal minimum
and therefore, the directors could not be made severally liable for the debt in question. It was
held that it was for the respondent being dominus litus, to choose persons of his choice to be
sued.

Section 147- Misdescription of name: 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 is 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. Such
instance was observed in the case of Hendon v. Adelman.[viii]

Section 239– Power of inspector to investigate affairs of another company in same group or
management: It provides that if it is necessary for the satisfactory completion of the task of an
inspector appointed to investigate the affairs of the company for the alleged mismanagement, or
oppressive policy towards its members, he may investigate into the affairs of another related
company in the same management or group.

Section 275- Subject to the provisions of Section 278, this section provides that no person can be
a director of more than 15 companies at a time. Section 279 provides for a punishment with fine
which may extend to Rs. 50,000 in respect of each of those companies after the first twenty.

Section 299- This Section gives effect to the following recommendation of the Company Law
Committee: “It is necessary to provide that the general notice which a director is entitled to give
to the company of his interest in a particular company or firm under the proviso to sub-section
(1) of section 91-A should be given at a meeting of the directors or take reasonable steps to
secure that it is brought up and read at the next meeting of the Board after it is given.[ix] The
section applies to all public as well as private companies. Failure to comply with the
requirements of this Section will cause vacation of the office of the Director and will also subject
him to penalty under sub-section (4).

Sections 307 and 308- Section 307 applies to every director and every deemed director. Not
only the name, description and amount of shareholding of each of the persons mentioned but also
the nature and extent of interest or right in or over any shares or debentures of such person must
be shown in the register of shareholders.

Section 314- The object of this section is to prohibit a director and anyone connected with him,
holding any employment carrying remuneration of as such sum as prescribed or more under the
company unless the company approves of it by a special resolution.

Section 542- Fraudulent conduct: If in the course of the winding up of the 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. In Popular Bank Ltd., In re[x] it was held that section 542
appears to make the directors liable in disregard of principles of limited liability. It leaves the
Court with discretion to make a declaration of liability, in relation to ‘all or any of the debts or
other liabilities of the company’. This [xi]section postulates a nexus between fraudulent reading
or purpose and liability of persons concerned.

JUDICIAL INTERPRETATIONS
By contrast with the limited and careful statutory directions to ‘lift the veil’ judicial inroads into
the principle of separate personality are more numerous. Besides statutory provisions for lifting
the corporate veil, courts also do lift the corporate veil to see the real state of affairs. Some cases
where the courts did lift the veil are as follows:

1. United States v. Milwaukee Refrigerator Transit Company[xii]– In this case, the U.S.
Supreme Court held that “where the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud or defend crime, the law will disregard the
corporate entity and treat it as an association of persons.”

Some of the earliest instances where the English and Indian Courts disregarded the
principle established in Salomon’s case are:

2. Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd[xiii]– This is
an instance of determination of the enemy character of a company. In this case, there was
a German company. It set up a subsidiary company in Britain and entered into a contract
with Continental Tyre and Rubber Co. (Great Britain) Ltd. for the supply of tyres. During
the time of war, the British company refused to pay as trading with an alien company is
prohibited during that time. To find out whether the company was a German or a British
company, the Court lifted the veil and found out that since the decision making bodies,
the board of directors and the general body of share holders were controlled by Germans,
the company was a German company and not a British company and hence it was an
enemy company.

3. Gilford Motor Co. v. Horne[xiv]– This is an instance for prevention of façade or sham.
In this case, an employee entered into an agreement that after his employment is
 terminated he shall not enter into a competing business or he should not solicit their
customers by setting up his own business. After the defendant’s service was terminated,
he set up a company of the same business.

His wife and another employee were the main share holders and the directors of the
company. Although it was in their name, he was the main controller of the business and
the business solicited customers of the previous company. The Court held that the
formation of the new company was a mere cloak or sham to enable him to breach the
agreement with the plaintiff.

4. Re, FG (Films) Ltd[xv]– In this case the court refused to compel the board of film
censors to register a film as an English film, which was in fact produced by a powerful
American film company in the name of a company registered in England in order to
avoid certain technical difficulties. The English company was created with a nominal
capital of 100 pounds only, consisting of 100 shares of which 90 were held by the
American president of the company. The Court held that the real producer was the
American company and that it would be a sham to hold that the American company and
American president were merely agents of the English company for producing the film.

5. Jones v. Lipman[xvi]– In this case, the seller of a piece of land sought to evade the
specific performance of a contract for the sale of the land by conveying the land to a
company which he formed for the purpose and thus he attempted to avoid completing the
sale of his house to the plaintiff. Russel J. describing the company as a “devise and a
sham, a mask which he holds before his face and attempt to avoid recognition by the eye
of equity” and ordered both the defendant and his company specifically to perform the
contract with the plaintiff.

6. Tata Engineering and Locomotive Co. Ltd. State of Bihar[xvii] – In this case, it was
stated that a company is also not allowed to lay claim on fundamental rights on the basis
of its being an aggregation of citizens. Once a company is formed, its business is the
business of an incorporated body thus formed and not of the citizens and the rights of
such body must be judged on that footing and cannot be judged on the assumption that
they are the rights attributable to the business of the individual citizens.

7. N.B. Finance Ltd. v. Shital Prasad Jain[xviii]– In this case the Delhi High Court granted
to the plaintiff company an order of interim injunction restraining defendant companies
from alienating the properties of their ownership on the ground that the defendant
companies were merely nominees of the defendant who had fraudulently used the money
borrowed from the plaintiff company and bought properties in the name of defendant
companies. The court did not in this case grant protection under the doctrine of the
corporate veil.

8. Shri Ambica Mills Ltd. v. State of Gujarat[xix]– It was held that the petitioners were as
good as parties to the proceedings, though their names were not expressly mentioned as
persons filing the petitions on behalf of the company. The managing directors in their
individual capacities may not be parties to such proceedings but in the official capacity as
 managing directors and as officers of the company, they could certainly be said to
represent the company in such proceedings. Also as they were required to so act as seen
from the various provisions of the Act and the Rules they could not be said to be total
strangers to the company petition.

APPROACH OF THE INDIAN COURTS

IN THE 21ST CENTURY
1. Subhra Mukherjee v. Bharat Coking Coal Ltd.[xx]– Sham or façade- In this case a
private coal company sold its immovable property to the wives of directors prior to
nationalization of the company. In fact, documents were ante-dated to show the
transaction was prior to nationalization of the company). Where such transaction is
alleged to be sham and collusive, the Court was justified in piercing the veil of
incorporation to ascertain the true nature of the transaction as to know who were the real
parties to the sale and whether it was genuine and bona fide or whether it was between
the husbands and wives behind the façade of the separate entity of the company.

2. Bajrang Prasad Jalan v. Mahabir Prasad Jalan[xxi]– Subsidiary-holding company-

The court, for the purpose of considering a complaint of oppression held that the
corporate veil can be lifted in the cases of not merely of a holding company, but also its
subsidiary when both are family companies.

3. Singer India v. Chander Mohan Chadha[xxii]– The concept of corporate entity was
evolved to encourage and promote trade and commerce but not to commit illegalities or
to defraud the people. Where therefore the corporate charter is employed for the purpose
of committing illegality or for defrauding others, the court would ignore the corporate
character and will look at the reality behind the corporate veil so as to enable it to pass
appropriate orders to do justice between the parties concerned.

4. Saurabh Exports v. Blaze Finance & Credits (P.) Ltd. [xxiii]– 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 D-3 and the brother of D-2. Allegedly on the
representation of D-4 that D-1 company was inviting short term deposits at good interest
rates, plaintiff made a deposit of Rs. 15 lakhs in the company for a period of 6 months.
When the company failed to pay the amount, the plaintiff sued it for the said amount
along with interest. D-2 and 3 denied their liability in the ground that there was no
personal liability of the directors as the deposit was received in the name of the company.

D-4 denied the liability on the ground that it had nothing to do with the transaction in
question as he was neither a director nor a shareholder of the company so it was held that
he had no locus in the company and hence not liable. It was held that D-3 being a
housewife had little role to play and therefore could not be made liable. The plaintiff was
sought to be defrauded under the cloak of a corporate entity of D-1 and, therefore, the
corporate veil was lifted taking into consideration that D-1 was only a family
 arrangement of the remaining defendants. D-2 was running the business in the name of
the company. So D-1 and D-2 were both personally liable.

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

Commissioner[xxiv]– This is a case of ‘default in payment of employee’s provident
fund’- Certain amount was due and payable to provident fund office by the sister concern
of the petitioner-company, a demand was raised on the petitioner company only on the
ground that two directors of these two companies were common. It was held that the
contention raised by the respondent that the Court should lift the corporate veil and fasten
the liability on the petitioner was without any merits and was baseless. Both the
companies were separate legal entities under the provisions of the Companies Act and
there was no provision under the Provident Fund Act that a liability of one company can
be fastened on the other company even by lifting the corporate veil.

6. The Decision of Karnataka High Court. Decided On 24.03.2011 – Richter Holding Ltd.
v. The Assistant Director of Income Tax[xxv]– Richter Holdings Ltd., a Cypriot
company and West Globe Limited, a Mauritian company purchased 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 alleging that the Petitioner had
indirectly acquired 51% in Sesa Goa Ltd and was, therefore, liable to deduct tax at source
before making payment to Early Guard Limited.

The Income Tax Department contended that as per section 195 of the Act, the Petitioner
is liable to deduct tax at source in respect of payment made for the purchase of the capital
asset. The High Court of Karnataka held that the Petitioner should reply to the show-
cause notice issued by the Tax department and urge all their contentions before it. The
High Court also emphasized that the fact-finding authority (Tax Department) may lift the
corporate veil to look into the real nature of the transaction to ascertain the vital facts.

The aspect that deserves greater attention is that the Karnataka High Court demonstrates
a keen interest in lifting the corporate veil. This has a number of implications. First,
the Richter Holding Case extends even further the scope of the principles laid down in
the Vodafone Case. For example, in Vodafone the Bombay High Court did not consider
lifting the corporate veil to impose taxation in case of indirect transfers.

Second, it is not clear from the judgment itself whether the tax authorities advanced the
argument regarding lifting the corporate veil. Third, the Karnataka High Court appears to
have readily permitted lifting the corporate veil without at all alluding to the
jurisprudence on the subject matter. Generally, courts defer to the sanctity of the
corporate form as a separate legal personality and are slow to lift the corporate veil, as
evidenced by Adams v. Cape Industries[xxvi], unless one of the established grounds
exist.[xxvii]

CONCLUSION
 It should be noted that the principle of Salomon v. A. Salomon & Co. Ltd.[xxviii] is still the rule
and the instances of piercing the veil are the exceptions to this rule. The legislature and the courts
have in many cases now allowed the corporate veil to be lifted. The principle that a company has
its own separate legal personality of its own finds an important place in the Constitution of India
as well. Article 21 of the Constitution of India, says that: No person shall be deprived of his life
and personal liberty except according to procedure established by law.

Under Article a company also has the right to life and personal liberty as a person. This was laid
down in the case of Chiranjitlal Chaudhary v. Union of India[xxix] where the Supreme Court
held that fundamental rights guaranteed by the constitution are available not merely to individual
citizens but to corporate bodies as well except where the language of the provision or the nature
of right compels the inference that they are applicable only to natural persons.

So, a corporation can own and sell properties, sue or be sued, or commit a criminal offence
because a corporation is made up of and run by people, acting as agents of the company. It is
under the ‘seal of the company’ that the members or shareholders commit fraud or such acts and
therefore the company should also be liable as it also a person which is accorded fundamental
rights under Article 21 of the Constitution of India.

The other side of this coin can be that, as the company is privileged to have its own right to life
and personal liberty, how can its fundamental right be taken away by disregarding its corporate
entity for the wrongs committed by its members and not the company itself.

As a result of incorporation, an incorporated company wears a ‘corporate veil’ and thus acquires
the ‘corporate personality’, behind which there are shareholders who have formed the company.
Although in law the company has an independent personality, it is an artificial person and hence,
behind the corporate curtain, there are natural persons, i.e. shareholders who have associated
themselves into a company. So if this corporate personality is uncovered or unveiled, the
shareholders or the directors mostly are found to be behind the veil.