LIFTING OR PIERCING THE CORPORATE VEIL

ACKNOWLEDGEMENT
The project on LIFTING OR PIERCING THE CORPORATE VEIL wo !" not h#$e %een !&'ht o( the "#) w&tho t the (o!!ow&n' peop!e #n" the&r pr&ce!e%% % pport #n" co*oper#t&on+ Hence we e,ten" o r he#rt(e!t 'r#t&t "e to #!! o( the-+ F&r%t #n" (ore-o%t. we wo !" %how #pprec&#t&on to Pro(+ GRACIA/ who %et the 0#!! ro!!&n' (or o r project+ We #re 'r#te( ! to h&(or ' &"&n' % thro 'ho t the project+ W&tho t h&% &n$#! #0!e project+ On the %#-e !&ne%. we wo !" !&2e to th#n2 o r co!!e'e !&0r#r&#n (or 0e&n' $er) o0!&'&n' #n" p#t&ent to o r nee"%+ L#%t. 0 t "e(&n&te!) not the !e#%t. we wo !" !&2e to th#n2 o r pr&nc&p#! Pro(+ Ph#"n&% (or pro$&"&n' #!! the enco r#'e-ent 3 he!p we wo !"n1t h#$e 0e&n' #0!e to "o re#! j %t&ce to the

LIFTING OR PIERCING THE CORPORATE VEIL

From the juristic point of view, a company is a legal person distinct from its members [Salomon v. Salomon & co. ltd., (1 !"# $.%. &&'. (his principle may be referred to as )the veil of incorporation*. (he courts in general consider themselves bound by this principle. (he effect of this principle is that there is a fictional veil (and not a wall# between the company and its members. (hat is, the company has a corporate personality which is distinct from its members. (he human ingenuity, however, started using this veil of corporate personality blatantly as a cloa+ for fraud or improper conduct. (hus it became necessary for the courts to brea+ through or lift the corporate veil or crac+ the shell of corporate personality and loo+ at the persons behind the company who are the real beneficiaries of the corporate fiction.

And while by fiction of law a corporation is a distinct entity, yet in reality it is an association of persons who are in fact the beneficial owners of all the corporate properly. The doctrine laid down in Salomon v. Salomon & co. ltd. Has to be watched very carefully. It has often been supposed to cast a veil over the personality of a limited company through which the courts cannot see. ut that is not true. The courts can and often do draw aside the veil. They an, and often do, pull off the mas!. They loo! to see what really lies behind."

56DICIAL E7CEPTION/+
The various cases in which corporate veil have been lifted are as follows#

8+ PROTECTION OF REVEN6E+ The courts may ignore the

corporate entity of a company where it is used for ta$ evasion. Ta$ planning may be legitimate provided it is within the framewor! of law. The following cases illustrate the point# Sir %inshaw &anec!'ee (etit, )e, A.I.). *+,-./ om. 0.+. %, an

assessee, who was receiving huge dividend and interest income, transferred his investments to 1 private companies formed for the purpose of reducing his ta$ liability. These companies transferred the income to % as a pretended loan. Held, the companies were formed by % purely and simply as a means of avoiding ta$

They did no business but were created simply as legal entities to ostensibly receive the dividends and interest and to hand them over to % as pretended loans. 2here it is desired to determine for ta$ purpose the residence of a company, the court will lift the veil and find out where it central management is, and that place will determine the residence of the company. 3ote the following case# Apthorpe v. peter schoenhofen brewing 4o. 5td., *+6,,/ 17 T.4. 1+. an 8nglish company bought the assets and business of an American company only as a matter of convenience. The American company was managed by directors appointed by the 8nglish company. Held, the American company was the agent of the 8nglish company and the whole or its profits

9+ PREVENTION OF FRA6D OR IMPROPER COND6CT:*

(he legal personality of a company may also be disregarded in the interest of justice where the machinery of incorporation has been used to some fraudulent purpose li+e defrauding creditors or defeating or circumventing law. ,rof. -rower observes in this regard that the veil of a corporate body will be lifted where the )corporate personality is being blatantly used as a cloa+ for fraud or improper conduct.* (hus in the following case where a company was incorporated as a device to conceal the identity of the perpetrator of the fraud, the court disregarded the corporate personality. .ones v. /ipman. (1!0&# all 1.2. 33&. /. $greed to sell a certain land to .. 4e subse5uently changed his mind and to avoid the specific performance against / and the company. (he court loo+ed to the reality of the situation. ignored the transfer, and ordered that the company should convey the land to .

;+ DETERMINATION OF CHARACTER OF A COMPAN< WHETHERN IT I/ ENEM<+ $ company may assume character

when persons in de facto control of its affairs are residents in an enemy country. 6n such a case, the court may e7amine the character of persons in real control of the company, and declare the company to be a enemy company. 8aimler %o. /td. 9. continental tyre & rubber co. ltd., (1!10# & $.% :;". $ company was incorporated in 1ngland for the purpose of selling in 1ngland tyres made in -ermany %ompany which held the bul+ of shares in the 1nglish company. (he holders of the remaining shares, e7cept one, and all the directors were -ermans, resident in -ermany. 8uring the First <orld <ar, the 1nglish company commenced an action for recovery of a trade dept. held, the company was an alien company and the payment of dept to it would amount to trading with the enemy, and therefore the company was not allowed to proceed with the action

=+ WHERE THE COMPAN< I/ A /HAM+ The courts also lift

the veil where a company is a mere cloa! or sham *hoa!/. The following case illustrates the point# :ilford &otor 4o. 5td. ;. Home, *+,00/ 4h. ,0< 4.A. Horne, a former employee of a company, was sub'ect to a covenant not to solicit its customers. He formed a company to carry on a business which, if he had done so personally, would have been a breach of the covenant. An in'unction was granted both against him and the company to restrain them from carrying on the business. The company was described in this 'udgement as a device, a stratagem", and as a mere cloa! or sham for the purpose of enabling the defendant to commit a breach of his covenant against solicitation.

>+ COMPAN< AVOIDING LEGAL O?LIGATION/. 2here the

use of an incorporated company is being made to avoid legal obligations, the court may disregard the legal personality of the company and proceed on the assumption as if no company e$isted. 8$ample. A and , partners in a film, sell their business to 4 and

underta!e not to start a similar business and not to compete with 4 for a certain number of years. After some time they form a private limited company, become the principal shareholders and directors and start a similar business. The court may restrain the company from carrying on the business competing with 4.

@+ COMPAN< ACTING A/ AGENT OR TR6/TEE OF THE /HAREHOLDER/+ 2here a company is acting as a agent
for its shareholders, the shareholders will be liable for the acts of the company. It is a =uestion of fact in each case whether the company is acting as agent for its shareholders. There may be an e$press agreement to this effect or an agreement may be implied from the circumstances of each particular case. 3ote the following case# >.:.>ilm 5td. In re *+,<0/ + All 8.). ?+<. An American company financed the production of a film in India in the name of a ritish company. The president of the American company held ,@ per cent of the capital of the trade of :reat ritish company. The board of ritish ritain refused to register the film as a

company acted merely as the nominee of the American

A+ AVOIDANCE OF WELFARE LEGI/LATION+ Avoidance of

welfare legislation is as common as avoidance of ta$ation and approach of the courts in considering problems arising out of such avoidance is generally the same as avoidance of ta$ation. It is the duty of the courts in every case where ingenuity is e$pended to avoid welfare legislation to get behind the smo!e screen and discover the true state of affair *wor!men of association rubber industry ltd. ;. associated rubber industry ltd., *+,6?/ <, comp. 4AS. +01 *S.4.//

B+ PROTECTING P6?LIC POLIC<+ The courts invariable lift the

corporate veil to protect the public policy and prevent transaction contrary to public policy. Thus where there is a conflict with public policy, the courts ignore the form and ta!e into account the substance A4onnors v. conners 5td., *+,1@/ 1 All

STATUTORY EXCEPTIONS.
N6M?ER OF MEM?ER/ ?ELOW /TAT6TOR< MINIM6M C/EC =>D:* If a company carries on business for more than ?
months after the number of its members has been reduced below . in case of a public company or - in case of a private company, every person who !nows this fact and is a member during the time that the company so carries on business after the ? months, is severally liable for the whole of the debts of the company contracted during that time, i.e. after ?months. It may be noted that in such a case the continuing members *i.e., those who continue to be members after ?months/7 *b/ 4an be sued and not those who have withdrawn from the membershipC

9+ FAIL6RE TO REF6ND APPLICATION MONE< C/EC+ @EC>DD:* The director of a company are 'ointly and severally
liable to repay the application money with interest if the company fails to refund the application money of those applicants who have not been allocated shares, within +0@days of the date of issue of the prospectus.

;+ MI/DE/CRIPTION OF COMPAN<1/ NAME C/EC 8=AC=DD:* 2here an officer or agent of a company does any act
or enters into a contract without fully or properly mentioning the companyDs name and the address of its registered office, he shall be personally liable. Thus where a bill of e$change, hundi or promissory note is signed by an officer of a company or any other person on its behalf, without mentioning this fact that he is signing on behalf of the company, he is personally liable to the holder of the instrument unless the company has already paid the amount. Hen"on $+ A!"er-#n. C8EA;D. 88A /+5+ @;8. The

=+ FRA6D6LENT TRADING C/EC+ >=9D#7 Sometimes in the

course of the winding up of a company it may appear that some business of the company, or any other person or for any fraudulent purpose. In such a case, the court may declare that any persons who were !nowingly parties to the carrying on of the business in this debts or other liabilities of the company as the court may direct. The court may do so on the application of the official li=uidator, or the li=uidator or any creditor or contributory of the company.

>+HOLDING AND /6?/IDIAR< COMPANIE/+ In the eyes of

the law, the holding company and its subsidiaries are separate legal entities. 8ven a +@@ per cent subsidiary is a separate legal entity and its creator and controller *i.e., the holding company/ is not liable for its breaches of contracts and torts. 3or can the

>ree 2heel *India/ 5td. ;. ;ed &itra, A.I.). *+,?,/ %elhi -<6. A holding company re=uested the court for restraining its subsidiary from issuing further capital as it would depreciate the value of its shares. The in'unction prayed for was refused on the ground that the subsidiary company had not lost its identity as a separate legal entity. ut in the following two cases, a subsidiary company may lose its separate identity to certain e$tent#7 0. 2here at the end of its financial year, a company has subsidiaries, it must lay before its members in general meeting not only its own accounts, but also a set of group accounts showing the profit or loss earned or suffered by the holding company and its subsidiaries collectively, and their collective state of affairs at the end of the year.

SALOMON VS. SALOMON CO. LTD (1897)

=r. Salomon had his own business of boot manufacturing, etc. Since his children wanted to be a part of the business as owners, =r. Salomon sold his business to the >ew %ompany (the company, he was planning to form# for a certain amount of money (3;;;; pounds#. 4e was selling his business to the new company as he +new that the %?=,$>@ 6S S1,$2$(1 /1-$/ 1>(6(@. 4e needed " members (shareholders# to form that company. Fortunately or unfortunately, he had A children. " members were foundB A children, 1 wife, and =r. Salomon himself. So, he gave himself &;;;; shares (1 pound each#, 1 share to each child (total A shares for A children# and 1 share to his wife. 4e elected his two children together with him to be the 8irectors of the company. (herefore =r. Salomon became a S4$214?/812.

ut since the company still owes &r. Salomon -@@@@ pounds, the company gives him debentures of +@@@@ pounds and rest +@@@@ pounds were paid in cash, etc. Therefore he is a SHA)8HE5%8) in the company, and now, a %8 83TF)8 HE5%8) too. ut he was a %I)84TE) also. So, He was SHA)8HE5%8), %I)84TE) & %8 83TF)8 HE5%8). He was an E)%I3A)G SHA)8HE5%8) who would be paid after all the creditors are paid I> TH8)8 IS 5IHFI%ATIE3 E> TH8 4E&(A3G. After + year, the company went into 5i=uidation *because the liabilities were more than assets by certain amount/ and the creditors needed to pay. The 5IHFI%ATE) as!ed &r. Salomon to pay all the creditors since &r. Salomon was the E238) of the company. Salomon did not agree with that. ecause He

T)IA5 JF%:8 ;AF:HA3 2I55IA&S agreed with 5i=uidator and as!ed SA5E&E3 to pay on behalf of the company since Salomon was the owner, but Salomon didnKt agree. He appealed to 4EF)T E> A((8A5 so that he *Salomon/ didnKt have to pay the debts owed to creditors by the company. 4EF)T E> A((8A5 said that Salomon 'ust found ? people *his < children & wife/ to form the company. Those ? people are mere nominees of &r. Salomon. 4EF)T E> A((8A5 also as!ed &r. Salomon to pay. This time /#!o-on appealed to the highest court LHEFS8 E> 5E)%SL. HEFS8 E> 5E)%S re'ected all the 'udgments made by T)IA5 JF%:8 ;AF:HA3 2I55IA&S, 4EF)T E> A((8A5.HEFS8 E> 5E)%S said that there is neither fraud in the manner which &r. Salomon formed the company, nor did &r. Salomon form the

So, &r. Salomon did not have to pay to the 4E&(A3GKS 4reditors since &r. Salomon and The 4ompany are two Separate *5egal/ 8ntities. The company is separate from its members.... In this case it was established that the actions of a company, are that of the company and not of the shareholders themselves. This is written into the 4ompanies Act +,,0 which states that a company is a legal entity in its own right separate from its shareholders" *5egislative 8$tracts, School of Accountancy, -@@+/. This law separates the company as another individual personMentity which will be held responsible for the fortunes of the company and separates all blame from the directorsMshareholders of the company e$cept under situations where the veil is lifted. This will however lead to situations where 'ustice can not be carried out as people will commit

IS COMPANY A CITIZEN
Although a company is regarded as a legal person*though artificial/,it is not a citiNen either under the 4onstitution of India or the 4itiNenship Act,+,<<7Heavy 8ngineering &aNdoor Fnion v.State of iharA+,?,B0, 4omp. 4AS. ,@<*S4/.The Supreme 4ourt of India in State Trading 4orporation of India 5td. ;. 4TEA+,?0B00 4omp. 4AS. +@<. held that a 4orporation *including a company/ cannot have the status of a citiNen under the 4onstitution of India. Thus, under the 4onstitutionC a company has no fundamental rights which are e$pressly available to citiNens only. It can, however, claim the protection of those fundamental rights which are available to all persons, whether citiNens or not, for e$ample, the right to own property.

In 3arasaraopeta 8lectric 4orp.. 5td. ;. State of &adras A+,<+B-+ 4omp.4as.-,. *&ad/, the High 4ourt observed that a company incorporated under the Indian 4ompanies Act does not satisfy the re=uirements of the definition of OcitiNenD in Article < of the 4onstitution and therefore is not a citiNen. Similar view was upheld by the Supreme 4ourt in the case of State Trading 4orporation of India 5td. ;. 4TEA+,?0B00 4omp.4as.+@<.*S4/.The Supreme 4ourt, in this case observed that the rights of citiNenship and the rights flowing from the nationality or domicile of a 4orporation are not coterminus.It would thus appear that the ma!ers of the 4onstitution had altogether left out the consideration of 'uristic persons when they enacted (artII of the constitution relating to citiNens and made a clear distinction between OpersonsD and OcitiNensD in

(artIII,which proclaims fundamental rights was very accurately drafted, delimiting those rights li!e freedom of speech and e$pression, the right to assemble peacefully, the right to practice a profession, etc, as belonging to citiNens only and those more general rights li!e the right to e=uality before the law, as belonging to all persons. 4orporation may have nationally in accordance with the country of their incorporationC but that does not necessarily confer citiNenship on them. There is also no doubt that (art II of the 4onstitution when dealing with citiNenship refers to natural persons only. This is further made absolutely clear by the 4itiNenship Act which confines citiNenship to natural persons only.

A company is also not allowed to lay claim to fundamental rights on the basis of its being an aggregation of citiNens. Ence a company or a corporation is formed, the business of the company or corporation is not the business of the citiNens but that of the company or corporation formed as an incorporated body, and the rights of the incorporated body must be 'udged on that footing and cannot be 'udged on the assumption that they are the rights attributable to the business of individual citiNens7Telco 5td. v. State of ihar A+,?1B01 4omp. 4AS. 1<6*S4/.

It should, however, be noted that certain fundamental rights enshrined in the 4onstitution are for protection of any person, for e.g., right to e=uality, etc *Article 1@/ are available to a company.

In 4hiran'ilal 4haudhari v. Fnion of India A+,<+B -+ 4omp. 4AS. 00*S4/,the Supreme 4ourt held that the fundamental rights guaranteed by the 4onstitution are available not merely to individual citiNens but to corporate bodies as well e$cept where the language of the provision or the nature of the right compels the interference that they are applicable only to natural persons. Similarly in ennet 4oleman 4omp. v. Fnion of IndiaA+,.-B

S.4.4. .66,6@?, the Supreme 4ourt e$tended the rule by stating it is now clear that the fundamental rights of shareholders as citiNens are not lost when they associate to form the company. 2hen their fundamental rights as shareholders are impaired by State action, their rights as shareholders are protected the reason is that the shareholdersD rights are e=ually and necessarily affected if the rights of the company are affected.