What is Lifting the Corporate Veil of company ?

"As a general rule a corporation is a legal entity distinct from its shareholders. The law on when
a Court may disregard this principle by lifting the corporate veil and regarding the company as a
mere agent or puppet of its controlling shareholder or parent corporation follows no consistent
principle.
The company lifting the corporate veil situation as the, 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.This protection is not
ironclad or impenetrable. Where a court determines that a company's business was not conducted
in accordance with the provisions of corporate legislation (or that it was just a faade for illegal
activities) it may hold the shareholders personally liable for the company's obligations under the
legal concept of lifting the corporate veil.
Recent developments of Lifting the Corporate Veil:
It is a fundamental principle of law that a company is an independent legal person distinct from
its members. This principle derives from the observation from Lord in Salomon v A Salomon &
Co Ltd that a 'company is at law a different person altogether from the subscribers to the
memorandum, this concept of separate legal personalities applies equally within groups of
companies. In described subsidiary companies as being 'separate legal entities with all the rights
and liabilities which would normally attach to separate legal entities' despite in one sense
(being) creatures of their parent companies.
Counsel for the defendants in VTB Capital described lifting the corporate the corporate veil as a
convenient label which is used to identify cases in which the courts have granted relief which
involves, or perhaps more accurately appears at first blush to involve' disregarding the principle
in Salomon. The courts are only willing to take this step for certain purposes and in very limited
circumstances. In order to understand the significance of the conflicting positions adopted in it is
helpful, as to look at the circumstances where the courts were first willing to grant relief and
lifting the corporate the veil of incorporation.
Core example of lifting the corporate veil:

In Salomon vs. Salomon company. Aron Salomon was a successful leather merchant who was
specialized in manufacturing leather boots. For many years he ran his business as a sole
proprietor. By 1892, his sons had become interested in taking part in the business. Salomon
decided to incorporate his business as a Limited company, Salomon & Co. Ltd.
At the time the legal requirement for incorporation was that at least seven persons subscribe as
members of a company i.e. as shareholders. Mr. Salomon himself was managing director. Mr.
Salomon owned 20,001 of the company's 20,007 shares - the remaining six were shared
individually between the other six shareholders (wife, daughter and four sons). Mr. Salomon sold
his business to the new corporation for almost 39,000, of which 10,000 was a debt to him. He
was thus simultaneously the company's principal shareholder and its principal creditor.
He asked the company to issue a debenture of 10,000 to him. However, a sudden slow down in
business occurred and the company could no longer pay interests to Salomon. Even the wife puts
money, but the company still could not pay. Finally, Salomon transferred the debenture to one B,
but still the company could not pay. B was here a secured creditor, in relation to the company, as
he holds a security over property of the company in term of the debenture
B called for a receiver and therefore, sold the easiest part of the company, i.e., the factory to
cover his debts. That led to the end of the business. This left the debts of the general creditors,
for instance, the general suppliers to be covered. The company had to be hence liquidated and the
assets were to be sold to pay them
In this case Salomon company appeal the high court says in Salomon company rules &
regulation following by the company act and Salomon & Salomon is not a same entity so
Salomon is not a personally liable. At the end of high court judgment against of Salomon.
Secondly Salomon appeals the court of appeal using by the agent & principal but court of appeal
judgment by Salomon because of principle liable for agents.
Lastly Salomon appeal by House of Lords, in house of lords different judgment by above two
courts because of the Salomon is not liable for personally and liability pay for shareholders 1 st

priority. Even Salomon company os liable for pay liability and Salomon not a liable for
personally.
In lifting the corporate the veil says remove the corporate veil Salomon is free for liability in
lifting the corporate veil working for three components that the complainant must prove in order
to

pierce

the

corporate

veil.

(Those

elements

are

as

follows

:)

1.Control and domination: Control and determination part of the test determines the
relationship between the shareholder and the corporation. Generally, mere majority stock
ownership will be insufficient to satisfy this element. Instead, one must show complete
domination, not only of finances, but of policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction has no separate mind, will or existence
of its own. To determine the existence of complete domination, courts usually require the
plaintiff to produce evidence of inadequate capitalization or undercapitalization, failure to follow
corporate formalities, commingling of funds, and diversion of funds or assets for non-corporate
purposes,

etc.

2. Improper purpose or use: This test requires the plaintiff to show that the control exercised by
the parent company or dominant stockholder was used by the defendant to commit fraud or
wrong, to perpetrate the violation of a statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiffs legal right. Thus, this second inquiry focuses on the
relationship between the plaintiff and the corporation. It is an explicit recognition that some
improper conduct must have occurred beyond establishing that the corporation was controlled
and

dominated.

3. Resulting damage or harm: In this test the plaintiff must show that the defendants control,
exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered. In
other words, the plaintiff must prove that, unless the corporate veil is pierced, it will have been
treated unjustly by the defendants exercise of control and improper use of the corporate form
and, thereby, suffer damages.
Therefore, the most important thing for the courts to remember while lifting the corporate veil is
to exercise care to balance the competing goals of incorporation and protecting creditors.