THE DOCTRINE OF LIFTING
THE CORPORATE VEIL
A Project Report on
Company Law
SUBMITTED TO: SUBMITTED BY:
Ms. ALAMDEEP
B.COM/LLB
10th SEMESTER
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ACKNOWLEDGMENT
I am deeply grateful to my teacher Ms. Alamdeep for giving me an opportunity to work on
this project. She has guided me throughout this project and she has always been a source of
guidance and motivation. I thank her for her confidence in my abilities and try my level best
to live up to her expectations.
I am also grateful to my parents for helping me from time to time.
Thanking You
SURABHI KAUSHIK
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1. Introduction
1.1 Meaning of Company
The word ‘company’ has no strictly technical or
legal meaning. In terms of companies Act, a
company means a company formed and registered
under the Companies Act. In Common Law
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 or perpetual succession. But the
company is not merely a legal institution. It is rather a legal device for the attainment of any
social or economic end and to a large extent publically and socially responsible. 1 Therefore,
company can be defined as- “A legal entity, allowed by legislation, which permits a group of
people, as shareholders, to apply to the government for an independent organization to be
created, which can then focus on pursuing set objectives, and empowered with legal rights
which are usually only reserved for individuals, such as to sue and be sued, own property,
hire employees or loan and borrow money.”2
1.2 Essential Features of a Company
1. Registration: A company comes into existence only after registration under the
Companies Act. But a Statutory Corporation is formed and commence business as notified or
stated in the Act and as passed in Legislature. In case of partnership, registration is not
compulsory.
2. Voluntary Association: A company is an association of many persons on a voluntary
basis. Therefore a company is formed by the choice and consent of the members.
3. Legal Personality: A company is regarded by law as a single person. It has a legal
personality. This rule applies even in the case of “One-man Company.”
1
Singh Avtar, Company Law, Eastern Book Company, Lucknow, 15th Edition, P. 1
2
http://www.duhaime.org/LegalDictionary/C/Company.aspx Last Visited on 2.3.2016 at 10:00 pm
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4. Contractual Capacity: A shareholder of a company, in its individual capacity, cannot
bind the company in any way. The shareholder of a company can enter into contract with the
company and can be an employee of the company.
5. Management: A company is managed by the Board of Directors, whole time Directors,
Managing Directors or Manager. These persons are selected in the manner provided by the
Act and the Articles of Association of the company. A shareholder, as such, cannot
participate in the management.
6. Capital: A company must have a capital, otherwise it cannot work.
7. Permanent Existence: The company has perpetual succession. The death or insolvency of
a shareholder does not affect its existence. A company comes into end only when it is
liquidated according to provision of the Companies Act.
8. Registered Office: A company must have a registered office.
9. Common Seal: A company must have a Common Seal.
10. Limited Liability: The liabilities of shareholder of a company are usually limited. The
creditors of a company are not creditors of individual shareholders and a decree obtained
against a company cannot be executed against any shareholders. It can only be executed
against the assets of the company.
11. Transferability: The shareholder of a company can transfer its share and ordinarily the
transferee becomes a member of the company.
12. Statutory Obligations: A company is required to comply with various statutory
obligations regarding management, e.g., filing balance sheets, maintaining proper account
books and registers etc.
13. Not a Citizen: A company is an artificial person, not a natural person. Therefore a
company is not a citizen, although it may have a Domicile
14. Residence: A company has a residence (for taxation and other purpose). A company does
not posses any fundamental rights.
15. No Fundamental Rights: Though a company has no fundamental rights, it can challenge
a law as void if the law happens to violate fundamental rights of citizens. In order to succeed
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the company must prove that the impugned law is expropriator of a citizen’s property.3
1.3 Companies Act, 2013
Companies Act 2013 is an Act of the Parliament of India which regulates incorporation of a
company, responsibilities of a company, directors, and dissolution of a company. The 2013
Act has replaced The Companies Act, 1956 (in a partial manner) after receiving the assent of
the President of India on 29 August 2013. The Act came into force on 12 September 2013
with few changes like earlier private companies maximum number of member was 50 and
now it will be 200. A new term of "one person company" is included in this act that will be a
private company and with only 98 provisions of the Act notified. The Act has been amended
in 2015 by the Companies (Amendment) Act, 2015.4
3
http://www.publishyourarticles.net/eng/articles2/17-essential-features-of-a-company/1907/ Last Visited on
2.3.2016 at 10:00 pm
4
http://www.mca.gov.in/MinistryV2/companiesact.html Last Visited on 2.3.2016 at 10:00 pm
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2. The Doctrine of Lifting the Corporate
Veil
2.1 The Concept
An incorporated company is
clothed with a distinct personality
by fiction of law. But in reality it is
an association of persons who, in a
way, are the beneficial owners of
the property of the body corporate.
A company being an artificial
person, cannot act on its own, it
can only act through natural
persons. Piercing the corporate veil
or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as
the rights or liabilities of its shareholders. Usually a corporation is treated as a separate legal
person, which is solely responsible for the debts it incurs and the sole beneficiary of the credit
it is owed. Common law countries usually uphold this principle of separate personhood, but
in exceptional situations may "pierce" or "lift" the corporate veil. An example would be
where a businessman has left his job as a director and has signed a contract to not compete
with the company he has just left for a period of time. If he sets up a company which
competed with his former company, technically it would be the company and not the person
competing. But it is likely a court would say that the new company was just a "sham", a
"cover" or some other phrase, and would still allow the old company to sue the man for
breach of contract. A court would look beyond the legal fiction to the reality of the situation.
2.2 Old Law
The oldest case on this issue was the Soloman v Soloman5 where it was decided that -
“In question of property and capacity, of acts done and rights acquired or, liabilities
assumed thereby….personalities of the natural persons who are the company’s
corporators is to be ignored.”
5
1896 UKHL 1
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This 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 Chiranjit Lal v Union of India6 the
Supreme Court did not allow a shareholder to sue for the violation of fundamental rights of
his company. Similarly in S.A.K. Chinnathambi v Murgugar7 it was held that a managing
director cannot be compelled in his personal capacity to produce books of which he has
custody in official capacity.
But it was realized that this theory cannot be pushed to unnatural limits. Circumstances must
occur which compel the courts to identify a company with its members. There are situations
where the court will lift the veil of incorporation in order to examine the ‘realities’ which lay
behind. Sometimes it is expressly authorized by the statute and sometimes the court will lift
of its own violation. It is now well accepted that the principles laid down in the case of
Solomon will not be doggedly followed where this would cause an unjust result. Hence
where the legal entity of a corporate body is misused for fraudulent and dishonest purposes,
the individuals concerned will not be allowed to take shelter behind the corporate personality.
8
In such cases the court will break through the corporate shell and apply the principle of what
is known as ‘lifting or piercing the corporate veil’. That is, the court will look behind the
corporate entity.
2.3 Meaning of ‘Lifting the Corporate Veil’
Lifting the corporate veil means disregarding the corporate personality and looking behind
the real person who are in the control of the company. In other words, where a fraudulent and
dishonest use is made of the legal entity, the individuals concerned will not be allowed to
take shelter behind the corporate personality. In this regards the court will break through the
corporate veil.
According to the definition of Black Law Dictionary," the piercing the corporate veil is the
judicial act of imposing liability on otherwise immune corporate officers, Directors and
shareholders for the corporation's wrongful acts."
6
1950 SCR 869
7
1968 (2) Comp LJ 260
8
Singh Avtar
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Aristotle said, when one talks of lifting status
of an entity corporate veil, one has in mind of
a process whereby the corporate is
disregarded and the incorporation conferred
by statute is overridden other than the
corporate entity an act of the entity.
When the principle is involved, it is
permissible to show that the individual
hinding behind the corporation is liable to
discharge the obligations ignoring the concept
of corporation as a legal entity. In DDA v. Skipper Construction Co. Pvt. Ltd. the Supreme
Court referred to the principle of lifting corporate veil. The concept of corporate entity was
evolved to encourage and promote trade and commerce but not to commit illegalities or to
defraud people. The corporate veil indisputably can be pierced when the corporate
personality is found to be opposed to justice, convenience and interest of the revenue or
workman or against public interest.
According to Lord Denning in Littlewoods Mail Order Stores Ltd. v. IRC, 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.”
In Central Inland Water Transport Corporation Ltd. v Brojo Nath Ganguly9 the Supreme
Court held that for the purpose of Article 12, one must necessarily see through the corporate
veil to ascertain whether behind that veil is the face of an instrumentality or agency of the
State.
Again in State of U.P. v Renusagar Power Company10 the Supreme Court held that the veil
of corporate personality even though not lifted sometimes, is becoming more and more
transparent in modern company jurisprudence11.
9
(1986) 3 SCC 156
10
AIR 1988 SC 1732
11
Paranjape N.V., Company Law, Central Law Agency, Allahabad, 2014, p. 34
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2.4 Reasons why we recognize the concept of ‘Lifting Corporate Veil’
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. 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.
2.5 Philosophy behind the concept
The doctrine of lifting the veil has been developed as a device to avoid the hardship of the
doctrine of corporate personality. It may be understood as the identification of a company
with its members. In order to protect themselves from the liabilities of the company its
members often take the shelter of the corporate veils. Sometimes these corporate veils are
used as a vehicle of fraud, or evasion of tax. To prevent unjust and fraudulent acts, it becomes
necessary to lift the veils to look into the realities behind the legal facade and to hold the
individual member of the company liable for its acts. T he corporate veil has been lifted by
the courts and legislatures both for the interest of equity, justice and good conscience.
Doctrine Law lifting the corporate veil as such is not given in the text of Indian Company
Law but could be inferred from number of provisions.
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2.6 When the Corporate Veil may be lifted?
Statutory Provisions Judicial Interpretations
2.6.1 Statutory Provisions
1. Section 5 of the Companies Act defines the individual person committing a wrong or an
illegal act to be held liable in respect of offences 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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
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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. The section applies to all public as well as private companies.
Failure to comply with requirements of this Section will cause vacation of the office of
the Director and will also subject him to penalty under sub-section (4).
7. 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.
8. 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.
9. 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.12
2.6.2 Judicial Interpretations
1. Determination of the real character of a company
In times of war, it becomes necessary to lift the corporate veil of a company to determine
whether the company has an enemy character. In Daimler Co. Ltd. v Continental Tyre &
Rubber Co13 a company was incorporated in England for the purpose of selling tyres
manufactured in Germany by a German company. The German company held the bulk of
shares in the English Company. The holders of all the shares except one and all directors
were Germans. Thus the real control of English company was in German hands. During the
First World War the English company commenced an action to recover a trade debt. And the
question was whether the company had become an enemy company and should, therefore, be
barred from maintaining the action.
12
Puliani Ravi, Bharat’s Companies Act, 2013, Bharat Law House Pvt. Ltd., New Delhi, 2014, P. 11
13
(1916) 2 AC 307
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The House of Lords held that a company is neither a friend nor an enemy but it may assume
an enemy character when persons in defacto control of its affairs are residents of an enemy
country. Accordingly, the company was not allowed to proceed with the action. If action
would have been allowed then the company would have become a machinery to give money
to the enemy which would have proved disastrous.
In People’s Pleasure Park Co. v Rohleder14 it was held that where there is no such danger to
public interest, the courts may refuse to tear open the corporate veil. In this case certain lands
were transferred to a company which was tin this case certain lands were transferred by an
Englishman to another perpetually restraining him from transferring the lands to Negroes.
The transferee however, transferred the land to a company which was exclusively composed
of Negroes. Thereupon, the petitioners brought an action for annulment of conveyance on
breach of condition. The court rejected the contention and held that members individually or
collectively are not corporation; a corporation has existence and entity separate from its
members.
2. For benefit of revenue
The court has the power to disregard the corporate entity if it is used for tax evasion or to
circumvent tax obligations. This is clear in Dinshaw Maneckjee Petit, Re: in this case the
assessee was a wealthy man, enjoying huge dividend and interest income. He formed four
private companies and agreed with each to hold a block of investment as an agent for it.
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 into four parts in a
bid to reduce his tax liability.
But 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, but was created simply as a legal entity to ostensibly receive the dividends and
interests and to hand them over to the assess as pretended loans.
In Apthorpe v Peter Schoenhofen Brewing Co15 it was held that aliens are not allowed to
hold land in New York. An English company acquired the business and assets of a New York
14
(1908) 109 Va 439
15
(1899) 4 TC 41
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company. But the American company was kept on foot to hold the land. The business was
financed and run by the English company. It was held that the American Company had
become the agent of the English company and thereafter, the whole of its profits were liable
to be taxed as the income of the English Company.
In CIT v Associated Clothiers Ltd 16 the assesses, Associated Clothiers, formed a company
holding all its shares. They sold certain premises to the new company. The difference
between the selling price and the cost of the property in the hands of assesses was assessed as
their income. They contended that this could not be done as there was no commercial sale,
but only a transfer from self to self. The court rejected this and held that it was sale from one
entity to another and not a trading with oneself.
From this point of view, incorporation sometimes becomes too dear. Shareholders are
virtually compelled to pay the price for the advantage of incorporation. Those shareholders
who become directors have then to owe duties of fiduciary nature to their own company and
they cannot use the assets of the company as if they were their own. In a way they become
strangers to their own enterprise.
3. Fraud or improper conduct
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 it is formed to
defeat or circumvent law, to
defraud creditors or to avoid legal
obligations.
In Gilford Motor Co v Horne17 Horne was appointed as a managing director of the plaintiff
company on the condition that ‘he shall not at any time while he shall hold the office of a
managing director or afterwards, solicit or the customers of the company.” His employment
was determined under an agreement. Shortly afterwards he opened a business in the name of
the company which solicited the plaintiff’s customers. It was held that the company was a
16
AIR 1963 Cal 629
17
{1933} 1 Ch 935
Page 14 of 17
mere cloak or sham for the purpose of enabling the defendant to commit a breach of his
covenant against solicitation. Evidence as to the formation of the company and as to the
position of its shareholders and directors leads to that inference. The defendant company was
a mere channel used by the defendant Horne for the customers of the plaintiff company, and
that the defendant company ought to be restrained as well as the defendant Horne.
In Jones v Lipman18 the defendant with the sole purpose of escaping the decree of specific
performance to convey a house to Jones (plaintiff), transferred the house to a company which
he had incorporated with a nominal capital. This was done pending the formalities of
conveyance. The defendant and his clerk were the only shareholders and directors of this new
company. It was held that the company was a mask and Lipman could not escape from his
liability. The court thus passed order of specific performance against both Lipman and the
company.
In P. N.B. Finance Ltd. v Shri Sital Prasad Jain19 it was held by the Delhi High Court that
the doctrine of piercing the corporate veil may be invoked whenever necessary by the Court
in the interest of justice, to prevent the corporate entity from being used as an instrument of
fraud, and the fundamental principle of corporate personality itself may be disregarded
having regard to the exigencies of the situation and for the ends of justice.20
4. Government Company
A company may sometimes be regarded as an agent or trustee of its members or of another
company and may, therefore, be deemed to have lost its individuality in favour of its
principle. In India this question has frequently arisen in connection with government
companies. A large number of private companies for commercial purposes have been
registered under the Companies Act with the President and a few other officers as the
shareholders. The advantage of becoming a government company is that rules can be
escaped. The Supreme Court has observed in a number of cases that a government company
is not a department; not an extension of the State. It is not an agent of the State. Thus
employees are not civil servants and thus prerogative writs cannot be issued against it.
18
(1962) 1 WLR 832
19
(1983) 53 Comp. Cas. 66
20
Ramaiya, Guide to Companies Act, Wadhwa and Co., Agra, 2004, P. 64
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In Som Prakash Rekhi v U.O.I.21 the company in question arose out of acquisition and
vesting in the Central Government of the assets and business of Burmah Shell. The employee
who had certain rights as to provident fund etc. against the former company, claimed them
against the Government by means of writ. His claim was resisted on the ground that the
undertaking had been vested in a company registered under the Companies Act and the
question of writ against a private company could not arise. J Krishna Iyyer brushed aside this
contention. He laid down emphasis upon the fact that the whole undertaking had been vested
in the Central Government and, fact that the law should not go by the fact whether the
company is registered under the Companies Act or otherwise, but by the nature of the
functions that the unit was performing. It was held that it is true that the real owner is the
State, the real operator is the State and the effective collectorate is the State. Nonetheless a
distinct juristic person with a corporate structure conducts the business.
5. Avoidance of Welfare Legislation
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
uphold the piercing of the veil to look at the retranslation.
21
(1981) 1 SCC 449
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BIBLIOGRAPHY
1. Majumdar A.K., Taxmann’s Company Law & Practice, Taxmann Publications (P)
Ltd. New Delhi, 2009
2. Paranjape N.V., Company Law, Central Law Agency, Allahabad, 2014
3. Puliani Ravi, Bharat’s Companies Act, 2013, Bharat Law House Pvt. Ltd., New
Delhi, 2014
4. Ramaiya, Guide to Companies Act, Wadhwa and Co., Agra, 2004
5. Saharay H.K., Company Law, University Law Publishing Co, Delhi, 2008
6. Singh Avtar, Company Law, Eastern Book Company, Lucknow, 15th Edition
7.
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WEBIOGRAPHY
1. http://www.duhaime.org/LegalDictionary/C/Company.aspx Last Visited on 2.3.2016
at 10:00 pm
2. http://www.mca.gov.in/MinistryV2/companiesact.html Last Visited on 2.3.2016 at
10:00 pm
3. http://www.legalserviceindia.com/articles/corporate.htm Last Visited on 2.3.2016 at
10:00 pm
4. https://en.wikipedia.org/wiki/Piercing_the_corporate_veil Last Visited on 2.3.2016 at
10:00 pm
5. http://www.publishyourarticles.net/eng/articles2/17-essential-features-of-a-
company/1907/ Last Visited on 2.3.2016 at 10:00 pm
