Banaras Hindu University

Subject: - Company law

Topic: - Doctrine of Lifting the corporate veil

Submitted To:
Dr. Mayank Pathak

SUBMITTED BY: Himanshu Chaudhary

ENROLLMENT NO: 372209

EXAM ROLL NO: 14137LA050

FACULTY OF LAW, BHU, VARANASI

Date:- 6/11/2017
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Acknowledgement
It was a great pleasure for me to prepare a project in one of the most
important topic of the Company law while dealing with the topic “Doctrine
of Lifting the corporate veil”

I came across many points related to it and tried my best to express it

in this project. This project is mainly focus on concept of this doctrine
and its implication. I have made special endeavors to present the
subject matter in the simple, systematic and lucid manner.
I am grateful to all those who helped me in writing the project, without
their help, it was not possible to complete this project. I am also
grateful to Dr. Mayank Pathak for giving me to prepare and present this
topic.
Thank you
Himanshu Chaudhary
3 |Doctrine of lifting the corporate veil

Contents
1. Introduction………………………………………………………………………………………… 4

2. Meaning of lifting or piercing of the Corporate Veil……………………………… 5 – 7

3. Origin of the Doctrine of Piercing of Corporate Veil……………………………… 8 – 10

4. Objectives of the Doctrine of Piercing of Corporate Veil……………………… 11 – 15

5. Judicial provisions or grounds for lifting The Corporate Veil……………….. 16 – 18

6. Statutory Provisions for Lifting the Corporate Veil……………………………… 19 – 20

7. Conclusion………………………………………………………………………………………... 21

8. Bibliography………………………………………………………………………………………. 22
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1. Introduction
Incorporation of an organization by registration was presented in 1844 and the precept
of limited liability of an organization followed in 1855. In this manner in 1897 in Salomon v.
Salomon And Company, the House of Lords influenced these establishments and solidified
into English law the twin ideas of limited liability and corporate entity. All things
considered, the pinnacle Court set out the rule that an organization is a distinct legitimate
person altogether not the same as the members of that organization. This guideline is
alluded to as the ‘veil of incorporation’.

The main preferred standpoint of incorporation from which all others follow is the separate
entity of the organization. As a general rule, be that as it may, the matter of the legitimate
person is constantly carried on by, and for the advantage of, a few people. In a definitive
investigation, some individuals are the real beneficiaries of the corporate preferences, “for
while, by the fiction of law, an enterprise is an unmistakable distinct entity, yet in all
actuality, it is a relationship of people who are in certainty the beneficial proprietors of all
the corporate property.

“And what the Salomon case decided is that ‘in questions of property and limit, of acts
done and rights gained or, liabilities expected in this manner… the personalities of the
natural persons who are the organizations’ corporations are to be overlooked”.

This hypothesis of corporate, entity is, in fact, the essential guideline on which the entire
law of corporation is based. The cases are not few in which the Courts have effectively
opposed the compulsion to get through the corporate shroud.

However, the hypothesis can’t be pushed as far as possible. “There are circumstances
where the Court will lift the veil of incorporation keeping in mind the end goal to analyze
the “realities” which lay behind. Now and again this is explicitly approved by statute… and
sometimes the Court will lift its own particular volition”.
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2. Meaning of lifting or piercing of the Corporate Veil

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.1

A simple 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.2 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.

Despite the terminology used which makes it appear as though a shareholder's limited
liability emanates from the view that a corporation is a separate legal entity, the reality is
that the entity status of corporations has almost nothing to do with shareholder limited
liability.3 For example, English law conferred entity status on corporations long before
shareholders were afforded limited liability. Similarly, the Revised Uniform Partnership
Act confers entity status on partnerships, but also provides that partners are individually
liable for all partnership obligations. Therefore, this shareholder limited liability emanates
mainly from statute.

The lifting of the corporate veil implies neglecting the corporate personality and looking for
the genuine individual who is in the control of the organization. At the end of the day,
where a false and deceptive utilize is made of the legitimate entity, the people concerned
won’t be permitted to take shield behind the corporate personality. In this respects, the
court will get through the corporate shell and apply the guideline of what is known
as “lifting or piercing the corporate veil.” And while by the fiction of law an organization is
an unmistakable element, yet truly it is an association of people who are in reality the
beneficial proprietors of all the corporate property.

In United States V. Milwaukee Refrigerator Co., the position was summed up as follows:

1. Larson, Aaron (12 July 2016). "Piercing the Corporate Veil". ExpertLaw. Retrieved 9 September 2017.
2. Henn, Harry G.; Alexander, John R. (1983). Law of Corporations (3 ed.).
3. Eisenberg, Melvin A. (2005). Corporations and Other Business Organizations, Cases and Materials (9 ed.). Foundation
Press. ISBN 1587788799., ch 4, 171
6 |Doctrine of lifting the corporate veil

“An organization will be looked upon as a lawful entity as a general rule…… however when
the idea of the legitimate element is utilized to vanquish public convenience, defend crime
or protect fraud, justify wrong, the law will view the enterprise as a relationship of people.”

In Littlewoods Mail Order Stores Ltd V. Inland Revenue Commrs, it was observed that:

“The regulation set down in Salomon v. Salomon and Salomon Co.Ltd must deliberately be
observed. It has frequently should cast a veil over the personality of a limited liability
organization through which the Courts can’t see. In any case, that is not valid. The Courts
can and generally it does draw aside the veil. They can and often do, pull off the cover. They
hope to perceive what truly lies behind”.

According to this doctrine; the doctrine says that “the principle of veil of incorporation is a
legal concept that separates the member of a corporation from the shareholders and
protect them from being personally liable for the companies obligation which is established
by the company separate legal entity but the fact, it can only act through human agent and
it cannot be neglected. Since the artificial person is not applicable of doing anything illegal
or fraudulent facet of corporate personality of corporate might to remove to identify that
person who are really guilty.”

Gallagher vs. Germania Brewing co.4

In this case Prof. Gower has analysed the “principle of Lifting the corporate veil”. A/c to
him, there are the cases where the court has looked behind the facade of the company and
its place of registration in order to determine its residence and for this purpose the test laid
down in the central management and control.

Tata Engineering & Locomotive Co. Ltd [TELCO] vs. State of Bihar and others5

In this case, the discretion of the court to lifting the corporate veil depends upon socio-
economic policy and moral factor operating through the corporation.

Central Island Water Transport Co. Ltd. vs. Brojo Nath Gangly 6

In this case, the Apex court while considering the question whether the appellant company
was an agency or instrumentality of the state for the purpose of the article 12 of the
constitution of India, inter alia observed:-

4. AIR 1893
5. AIR 1965
6.AIR (1986) 3 SCC 156
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“For the purpose of Art. 12, one must necessarily see through the
corporate veil to ascertain whether behind that veil is the face of an instrumentality or the
agency of the state”.

Renusagar Power Company vs. State of U.P.7

In this case, the SC observed that “the veil of corporate personality even though not lifted it
becomes more and more in modern company jurisprudence”.

Or In other word, the theory or doctrine of lifting the corporate veil becomes more and
more transparent in modern company jurisprudence

7. AIR 1988 SC 1732

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3. Origin of the Doctrine of Piercing of Corporate Veil

A company is regarded as a distinct legal entity with a separate existence from its
membership and management team. The independent legal status of the corporate
entity is said to cast a veil between the company and its human constituents- ‘the
corporate veil’ or “the shell of incorporation”. This veil serves as a partition or curtain
between the company and its members and is regarded as a privilege for the share
holders as it protects them from the risk of unlimited liability for the debts of the
company.8

However, such privilege of limited liability may not always exist for certain reasons
including when the legal personality of a company is used for illegitimate or unlawful
purposes. If it is shown that the legal personality has been abused and used to the
detriment of third parties (creditors), the theory of legal personality (i.e. the separate and
distinct existence of the company from that of its members) is disregarded and it is
looked upon as a collection of persons instead of a collection of capital.9 Consequently, the
individual members will be held liable for the wrongs caused through the use of the legal
entity. Hence, when this is done by courts or sometimes by statute, it is said that the
corporate entity is disregarded or the veil of incorporation is pierced.

The doctrine of piercing the corporate veil has its origin in the common law legal system
particularly in England.10 Originally, it was a reaction to a rigid stand of the House of Lords
on a famous decision that is known for establishing the principle of distinct entity of the
corporation. In the Salomon V. Salomon & Co. Ltd case (as stated above) the House of Lords
decided that a corporation is different from its share holders. The House of Lords decided
that:-

“The company is at law a different person altogether from the subscribers to the
memorandum; and though 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 trustee for them. Nor

8. Bagrial, Ashok K., Company Law, (12th revised ed.), p. 35

9. Ottolenghi, S., ‘From Peeping behind the Corporate Veil, to Ignoring it Completely’, the Modern Law Review, Vol.53, No. 3,
Blackwell publishing, 1990, p.338-339
10.Supra p. 340
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are the subscribers as members liable, in any shape or form, except to the extent and in the
manner provided by the act (law).”11

Therefore, this decision established not only one of the most important principles of
corporate personality that a corporation is a distinct entity apart from that of its
shareholders but it also led to the development of another important doctrine- “piercing
the corporate veil”. After this case, the realization that the corporate personality could be
used in a fraudulent manner came into the area of the law governing corporations.
Consequently, the doctrine of piercing the corporate veil began to assume a certain shape
and form and recognized in different forms both in the common law and civil law legal
systems.

Thus, piercing the corporate veil refers to the possibility of looking behind the company-
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, and are only normally liable to pay the company what
they agreed to pay by way of share purchase price).

Such terms as “lifting the veil”, “breaching the wall of incorporation”, “dislodging the
corporate veil” or “piercing the corporate veil” are all legal terms of arts used to denote the
same thing (i.e. the denial of the privilege of legal personality and limited liability).

In short, the piercing of corporate veil doctrine is an exception to the general rules of
limited liability and separate corporate personality. In other words, under the doctrine,
limited liability protection for shareholders and separate corporate personality may be
overridden if certain conditions are met. The courts have repeatedly asserted that the
doctrine is an equitable one and requires a weighing of the totality of the circumstances.
Many states, in general sense, have promulgated a two-prong (tier) test to apply piercing
the corporate veil doctrine requiring that:-

 There must be such a unity of interest and ownership between the corporation and
its owners that their separate personalities have ceased to exist in reality. These
factors include lack of substantive separation between the shareholders and the
corporation, intertwining, non-observance of corporate formalities, shareholder
domination, and overlap of corporate personnel and management.12

11.Griffin Stephen, Company law: fundamental principles, (4th ed.), Pearson Longman, 2008, p. 6
12.Backer, Larry Cata, Comparative Corporate Law: United States, European Union, China and Japan, Cases and
Materials, Carolina Academic Press, Durham, 2002, p. 987
10 |Doctrine of lifting the corporate veil

 Second, an adherence to separate corporate personality would create inequitable

results (injustice). That is, an inequitable result would occur if the acts are treated as
those of the corporation alone (a fairness requirement).

Hence, the application of piercing the veil requires the judge to discover the facts of a
particular situation. That is, the determination of a veil piercing claim requires the judge to
ascertain facts such as the extent of overlap in corporate personnel, non-observance of
corporate formalities, and the degree of shareholder domination of the corporation, unity
of interest and ownership and evaluate them in light of the doctrine’s underlying values of
good faith and fairness.13 Principally, whether the corporate entity should be set aside
comes down to a question of good faith and honesty in the use of corporate privilege for
legitimate ends. It is asserted that veil piercing is justified when the notion of legal entity is
used to defeat public convenience, justify wrong, protect fraud, or defend crime. These
statements suggest that the corporate veil doctrine requires good faith and fair use of the
corporate entity. This duty of good faith and fairness as principles of truth and respect in a
corporation’s dealing with its creditors are some of the substantive objectives of the legal
order, or desirable goals or values.

In short, the corporate veil doctrine is non-conclusive. With its reference to desirable values
and its non-conclusiveness, the corporate veil doctrine exhibits the open- endedness of a
standard. That is, there is no single uniform standard for deciding and justifying veil
piercing. The courts make a determination based on notions of fundamental fairness and
justice on a case-to-case basis.

13. Bagrial, Ashok K., Company Law, (12th revised ed.), Vikas Publishing House Pvt. Ltd., New York, 2007, p.509.
11 |Doctrine of lifting the corporate veil

4. Objectives of the Doctrine of Piercing of Corporate Veil

The doctrine of piercing the corporate veil is applied with a view of attaining different
objectives. However, given the variety of corporate veil cases, it is probably impossible to
arrive at a single objective of piercing the veil that encapsulates all the cases.

These objectives are not mutually exclusive; the courts have expressed a desire both to
compensate and to deter or to avoid unlawful enrichment within one case.

Hence, there are different objectives for the application of piercing the corporate veil.
Some of the principal objectives of piercing the corporate veil are:-

(i) Protection of Creditors:-

Piercing of the corporate veil doctrine performs a compensatory function to creditors.

Creditors who are compensated by the doctrine of piercing the corporate veil could be
either voluntary (contractual) and involuntary (tort) creditors.14

With regard to contract or voluntary creditors, the doctrine helps to compensatory effects
of the underlying contractual damages that otherwise would have restore the full
compensatory effects of the underlying contractual damages that otherwise would have
been curtailed by limited liability. For example, a contractual creditor whose breach of
contract claim is worth 1 million ETB against a corporation with 500,000 ETB assets would
have been denied half of its compensation if limited liability were strictly adhered to.
Operation of the limited liability rule would have confined maximum recovery to the sum of
the corporation’s assets. The doctrine ignores, or at least mitigates, the assumption that
compensation from a corporation is intended to be subject to an implicit cap (ceiling) under
limited liability.

The assumption is that when a contractual creditor enters into a transaction with the
corporation, it implicitly accepts the fact that its maximum recovery is limited to the
corporate assets. If such a creditor desires extra credit protection, perhaps in the form of
shareholder personal guarantees or real securities, it should negotiate for it (i.e. the
creditor can negotiate with the company ex ante). Failure to undertake such negotiation is
an implied acceptance of the cap (ceiling) on its maximum recovery imposed by limited
liability.

The doctrine of piercing the corporate veil mitigates the above assumption due to various
reasons.

14.Cheng Thomas K., ‘Form and substance of the doctrine of piercing the corporate veil’, Mississippi law journal, Vol.
80, No. 2, 2010, p. 530
12 |Doctrine of lifting the corporate veil

First, due to the fact that when a contractual creditor transacts with a corporation, one of
the implied terms in the contract is that the integrity and autonomy of the corporation will
be respected and that the corporation will not be used for improper purposes (i.e. the
contractual relationship requires good faith and fair use of the corporate entity). In this
sense, veil piercing (which is applied at the time when the company is used for improper
acts) can be viewed as judicial enforcement of the implied terms of the contract (i.e.
enforcement of the breach of the implied terms of good faith and fair use of the corporate
entity). For example, veil piercing based on shareholder misappropriation of
corporate assets can be understood as enforcing the implied contractual term that the
shareholders will not engage in ex post opportunistic conduct. Second, it is difficult and
costly to negotiate contract-based protections in advance.

Particularly, it is too costly to small creditors to afford. Moreover, it is difficult to delineate

(outline) the varieties of ex post shareholder opportunism and designing the appropriate
protection against them.

Hence, piercing the corporate veil (by serving as a default rule) helps the parties to rely on
the courts to supplement their contracts. By piercing the veil, the courts would be filling the
gaps in the contract and inserting terms that the parties would have wanted to include and
protect the creditor who did not have the bargaining power.

Another type of creditors which need much more protection or compensation is

involuntary tort claimants. Like contract cases, in tort cases too, limited liability makes
compensation from a corporation to be subject to an implicit cap under limited liability. The
legislator has made a policy determination that tort damages be subject to a similar cap
due to the assumption taken by the legislator that potential tort victims are expected to
take out insurance, in advance, to make up for the shortfall. Yet, the assumption may not
always turn to be true as it is difficult to take insurance, in advance, for potential or even
unknown risks. Moreover, unlike tort cases, in a contractual arrangement, a creditor can
adjust his return so as to account for the perceived risks of lending money to the
corporation (i.e. contracting ex ante for extra credit protection is possible). That means,
such type of self-protection is not available to the tort claimant who is an involuntary
creditor of the corporation.15

rd
15.Solomon, Lewis D., and others, Corporations Law and Policy: Materials and Problems, (3 ed.), American case book series,
West publishing Company, USA, 1994 , p.334
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(ii) Prevention of Unjust Enrichment of Shareholders:-

Prevention of unjust enrichment of the shareholders is the other objective of the

corporate veil piercing doctrine. Unjust enrichment is the consequence that may result if
separate corporate personality is strictly adhered to (i.e. it is enrichment at the expense of
another). In other words, unjust enrichment is the equitable principle by which one, who
has been enriched at the expense of another, whether by mistake, or otherwise, is under a
duty to return what he has received or its value to the other.16

The benefits received by a corporation are the proceeds of a loan or purchase money for
corporate bonds. To the extent that the corporation, and by extension the shareholders,
receive these benefits without making full payment for them and the default risks have not
been fully compensated for, the shareholders can be said to have been enriched. 17 It is
obvious how shareholders are enriched if these benefits have not been fully paid for.
Shareholders’ enrichment only becomes unjust if the circumstances under which it arises
can be considered unjust under notions of natural justice or equity. This means that mere
non-satisfaction of corporate liabilities would not constitute unjust enrichment. It is only
when the enrichment results under unjust circumstances, such as when the shareholders
have misappropriated corporate assets, hence leaving insufficient assets to satisfy the
outside creditors, that veil piercing is justified. In this instance, the unjust enrichment
equals the amount of assets misappropriated by the shareholders that would have been
available to the creditors.

As stated above, unjust enrichment is premised on notions of natural justice and equity.
This echoes the courts’ repeated assertions that the corporate veil doctrine is ultimately
about preventing injustices. The characterization of unjust enrichment as an equitable
principle that allows the courts to create individualized exceptions to general legal rules
also suitably describes the role of the corporate veil doctrine as a standard-based exception
to the general rule of limited liability. The courts have in fact used unjust enrichment of the
shareholders as a basis for veil piercing in some cases. Unjust enrichment compels the
recipient of an ill-gotten benefit to return it to the rightful beneficiary. Hence, the corporate
veil doctrine compels the share holders, who have unjustly benefited from the protection of
limited liability, to return the benefit to the creditors on grounds of fairness.

16. Supra Note 12.

17. Ibid.
14 |Doctrine of lifting the corporate veil

(iii) Deterrence for Future Improper Conduct:-

Deterrence is another possible objective of veil piercing. It is a particularly fitting objective

in light of the requirement of improper conduct in the various formulations of the doctrine.
The types of conduct that qualify as improper conduct that the law would like to deter
include fraud, circumvention of a statutory prohibition, misappropriation of assets,
misrepresentation, and other cases of wrong or injustice. There have been plenty of cases
in which the courts combined veil piercing with punitive damages with the express purpose
to achieve deterrence.18

The courts combined both personal liability and punitive damages to deter the
defendant from engaging in similar conduct in the future. However, the need to combine
shareholder liability with punitive damages to achieve deterrent effects seems to
suggest that veil piercing alone does not suffice for deterrence purposes. Moreover,
attributing deterrence as the principal objective of the doctrine is complicated by the
general judicial consensus that the doctrine is an equitable one whose goal is to prevent
injustices. However, courts implicitly and sometimes explicitly acknowledge
deterrence as a goal of piercing the corporate veil.

The logical question that follows is therefore how liability imposed through veil piercing
creates deterrence?

For the law to have a deterrent effect on undesirable conduct, the penalty must be greater
than the benefits the defendant obtains from such conduct. Otherwise, the defendant
would be always willing to take a chance with the hope that the conduct will not be
detected. If the penalty is the same as the benefit from the undesirable conduct, the
defendant will have nothing to lose if s/he is caught. In fact, theoretically, the penalty or
damages should be set as the benefit multiplied by the reciprocal of the probability of
apprehension (possibility of detection). For example, if the shareholder’s dissipation of
corporate assets has a 20% chance of detection, and the dissipated assets are worth 1
million ETB, the penalty on the defendant should be set at 5 million ETB to achieve full
deterrent effect.

The question of how the corporate veil doctrine achieves deterrence needs to be analyzed
differently for intentional improper conduct and non-intentional, probabilistic
improper conduct such as negligence-based torts. This is because as far as intentional
conduct is concerned, the perpetrator has control over whether the conduct is undertaken.

18.Ibid p. 540
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In order to deter such conduct, the law needs to impose an expected penalty on the
perpetrator that is equal to the benefit multiplied by the reciprocal of the probability of
apprehension (detection).

Deterrence of probabilistic conduct is relatively straightforward. The main type of such

conduct as far as the corporate veil doctrine is concerned is negligence-based torts
committed by the corporation. In this case the tort may take place despite the precautions
undertaken by the tort feasor. Thus the law needs to ensure that the tort feasor is liable for
the full damages it causes so that it internalizes the full costs of its negligent conduct. To
the extent that the underlying tort damages were already set to achieve deterrence,
preservation of the deterrent effect only requires that the corporation and its
shareholders fully internalize the harm caused by the tort. In other words, the corporate
veil doctrine only needs to shift unmet liabilities to the shareholders, which is precisely
what the doctrine does.

However, it is argued that share holders liability resulting from veil piercing does not
achieve effective deterrence. Moreover, one may argue that the corporate veil doctrine
should not be concerned with shareholder misconduct if it does not result in failure to meet
corporate liabilities.

In short, though there are arguments against deterrence, as an objective of piercing the
corporate veil, some common law courts either explicitly or implicitly cite it as one purpose
of piercing in their decisions.
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5. Judicial provisions or grounds for lifting The Corporate Veil

(i) Fraud or Improper Conduct

The Courts have been more than arranged to pierce the corporate veil when it feels that
fraud is or could be executed behind the veil. The Courts won’t enable the Salomon
standard to be utilized as an engine of fraud. The two great instances of the fraud exception
are Gilford Motor Company Ltd v. Horne and Jones v. Lipman. In the case of Gilford Motor
Company limited vs. Horne,19 Mr. Horne was an ex-worker of The Gilford engine
organization and his business contract gave that he couldn’t solicit the clients of the
organization. With a specific end goal to crush this, he incorporated a limited organization
in his better half’s name and solicited the clients of the organization. The organization
brought an action against him. The Court of appeal was of the view that “the organization
was shaped as a gadget, a stratagem, keeping in mind the end goal to veil the viable
carrying on of the business of Mr. Horne” for this situation obviously the primary reason for
incorporating the new organization was to execute fraud. Along these lines, the Court of
appeal viewed it as a negligible sham to shroud his wrongdoings.

In the second instance of Jones v. Lipman,20 a man contracted to offer his territory and
after that point altered his opinion with a specific end goal to keep away from an order of
specific performance, he transferred his property to an organization. The court, in this case,
held that the organization here was “a veil which (Mr. Lipman) holds before his face trying
to maintain a strategic distance from acknowledgment by the eye of equity” Therefore the
court ordered for specific performance both against Mr. Lipman and the organization.

(ii) For Benefit of Revenue

“The Court has the ability to ignore corporate substance in the event that it is utilized for
tax evasion or to dodge tax commitments. A reasonable outline is Dinshaw Maneckjee
Petit, Re;

The assessee was a rich man enjoying gigantic profit and interest income. He formed four
privately owned businesses and concurred with each to hold a piece of speculation as an
operator for it. Income received was credited in the accounts of the organization however

19. 1993 ch 935

20. (1962) 1 WLR 832
17 |Doctrine of lifting the corporate veil

the organization gave back the sum to him as a pretended loan. Along these lines, he
separated his income into four sections in an offer to lessen his tax liability.

It was held that “the organization was formed by the assessee absolutely and basically as a
method for maintaining a strategic distance from super tax and the organization was just
the assessee himself. It did no business, yet was made basically as a legitimate entity to
apparently get the profits and interests and to hand them over to the assessee as
pretended loans”.

Juggilal Kamlapat vs. CIT,21

In this case, SC held that the court has power to disregard corporate entity if it is used for
tax evasion or to circumvent tax obligation or lifting the corporate veil is permissible in the
cases of tax evasion even in the absence of any statutory provisions.

Bucha F. Guzdar vs. CIT, 22

In this case, the 60% income of Tea Company was exempted as agriculture income under IT
Act and 40% was taxable. The plaintiff was the member of Tea Company and receive
dividend with respect to share. She claimed exception of 60% but the SC reject the plea by
applying the corporate veil principle and found actual exemption has been taken already by
company. So, dividend was taxable 100%.

(iii) Enemy Character

It becomes necessary to determine the character of a company. In such a case, the courts
may in their discretion examine the character of persons in real control of the corporate
affairs.

An organization may expect a foe character when people in true control of its affairs are
occupants in an enemy nation. In such a case, the Court may analyze the character of
people in genuine control of the organization, and announce the organization to be an
adversary organization.

In Daimler Co. Ltd V. Mainland Tire And Rubber Co. Ltd,23 An organization was
incorporated in England with the end goal of selling in England, tires made in Germany by a
German organization which held the majority of shares in the English organization. The
holders of the rest of the shares, aside from one and every one of the chiefs were Germans,
living in Germany. Amid the First World War, the English organization commenced an

21. AIR 1970 SC

22. AIR 1955 SC 74
23. (1916) 2 AC 307
18 |Doctrine of lifting the corporate veil

action for the recuperation of a trade debt. Held, the organization was an outsider
organization and the payment of debt to it would add up to trading with the foe, and in this
manner, the organization was not permitted to continue with the activity.

(iv) Agency or trust

It appears that it is very difficult to persude the court to go behind the corporate entity of
company to determine whether it is really independent or is being used as an agent or
trustee.

Where an organization is going about as agent for its investor, the investors will be
obligated for the acts of the organization. It is an issue of facts for each situation whether
the organization is going about as an agent for its investors. There might be an Express
consent to this impact or an agreement might be suggested from the conditions of every
specific case.

In the case of F.G.Films ltd,24 An American organization financed the creation of a film in
India in the name of a British organization. The leader of the American organization held
90% of the capital of the British organization. The Board of exchange of Great Britain
declined to register the film as a British film. Held, the decision was substantial in
perspective of the way that British organization acted only as the nominee of the American
Company.

24. (1953) 1 WLR 483

19 |Doctrine of lifting the corporate veil

6. Statutory Provisions For Lifting The Corporate Veil

(i) Reduction Of Number Of Members
Under Section 45 of The Indian Companies Act, 1956, if an organization carries on business
for over a half year after the number of its members has been diminished to seven if there
should arise an occurrence of a public company and two in the event of a privately owned
business, each individual who knows this fact and is a member during the time that the
organization so carries on business after the half year, becomes liable severally and jointly
with the organization for the payment of debts contracted following a half year. It is just
that part who stays after a half year who can be sued.

(ii) Fraudulent Trading

Under Section 542 of The Indian Companies Act, 1956, if any business of an organization is
gone ahead with the aim to defraud creditors of the organization or creditors of some other
individual or for any deceitful reason, who was intentionally a party to the carrying on of
the business in that way is subject to imprisonment or fine or both. This applies regardless
of whether the organization has been or is in course of being twisted up. This was upheld
in Delhi Development Authority v. Captain Constructions Co. Ltd. (1997).

(iii) Misdescription of the Company

Section 147 (4) of The Indian Companies Act, 1956, gives that if any officer of the
organization or other individual acting on its benefit signs or approves/authorized to be
signed by the organization any promissory note, bill of exchange, order or cheque for
money or goods, endorsement in which the organization’s name is not specified in readable
letters, he is obligated to fine and he is personally liable to the holder of the instrument
unless the organization has effectively paid the sum.

(iv) Failure to Refund Application Money

As indicated by Section 69(5) of The Indian Companies Act, 1956, the executives of an
organization are mutually and severally at risk to reimburse the application cash with
premium if the organization neglects to refund the cash within 130 days of the date of issue
of the prospectus.

(V) Holding and Subsidiary Companies

20 |Doctrine of lifting the corporate veil

In the eyes of law, the holding organization and its subsidiaries are separate legitimate
entities.

However, in the accompanying two cases, the subsidiary may lose its different entity-

 Where toward the end of its monetary year, the organization has subsidiaries, it must
lay before its members in meeting not only its own particular accounts but also
append therewith yearly accounts of each of its auxiliaries along with copy of the
board’s and examiner’s report and a statement of the holding organization’s interest
in the subsidiary.

 The Court may, on the facts of a case, regard a subsidiary as simply a branch or
division of one expensive endeavor claimed by the holding organization.
21 |Doctrine of lifting the corporate veil

7. Conclusion
So at last we can say that in this manner, it is bounteously certain that
incorporation does not cut off individual liability consistently and in all conditions. “Honest
enterprise, by methods for organizations, is permitted; however people, in general, are
ensured against kitting and humbuggery”. The holiness of a different entity is maintained
just in so far as the entity is consonant with the fundamental approaches which give it life.

Along these lines, the individuals who enjoy the advantages of the machinery of
incorporation need to guarantee a capital structure satisfactory to the size of the
enterprise. They should not pull back the corporate assets or blend their own individual
accounts with those of the corporation. The Courts have now and again seized upon these
realities as evidence to legitimize the burden of liability upon the investors.

The demonstration of piercing the corporate veil up to this point says a standout amongst
the most disputable subjects in corporate law. There are categories, for example, agency,
fraud, facade or sham, group enterprises, and unfairness, which are accepted to be the
most curious premise under which the Law Courts would pierce the corporate veil.
However, these categories are simple rules and in no way, means far from exhaustive.
22 |Doctrine of lifting the corporate veil

8. Bibliography
BOOKS
1. Dr.N.V.Paranjape, Company Law; 4th ed; 2007, Central Law Publication,
Allahabad.
2. Avatar Singh, Company Law; 17th ed; 2015, Eastern book company,
lucknow.

Websites
I. www.google.co.in
II. www.indiankanoon.co.in
III. https://www.lawteacher.net
IV. https://www.lawctopus.com