INTRODUCTION

When a company is incorporated it is treated as a separate legal entity distinct from its promoters,
directors, members, and employees; and hence the concept of the corporate veil, separating those
parties from the corporate body, has arisen. The issue of "lifting the corporate veil" has been
considered by courts and commentators for many years. However, the topic has not received the
attention in the literature that one would expect. No clear set of principles has emerged and it is
difficult to predict when the courts will disregard the separate entity principle. The need for English
courts to resort to such metaphorical terms as "mere fraud," "sham," "dummy," "alter ego" in their
judgments indicates their difficulties. Nor do the English courts have a monopoly on metaphorical
judgments. There is equal confusion and uncertainty in the Australian and United States
jurisdictions. Some researchers argue that the courts have become increasingly willing to lift the
veil
The central purpose of this paper is to investigate the bounds of the principle of limited liability.
Part I of this paper will briefly survey the concept of company as a separate entity. Part II deals
with law of piercing the veil. Part III analyses the common law grounds of lifting the veil that have
been frequently proposed, to determine the underlying reasons for judicial disregard of the separate
entity principle. It is suggested in this paper that these common law exceptions, viz. agency, fraud,
avoidance of obligations, prevention of injustice, and imputation of members' characteristics to the
company, are symptomatic of the courts' attempts to ensure that parties, both shareholders,
creditors, and other third parties who may be considered by the court to have a legitimate interest
in the affairs of the corporation, are not disadvantaged by actions of company management and
shareholders protected by limited liability. Part IV deals with the comparative aspect of the
statutory provisions regarding piercing of veil. Part V deals with the comparative analysis of UK,
USA, German and Indian veil piercing jurisprudence. Part V reviews some of the more recent
cases in which courts have applied their piercing tests. This flexibility extends, in the last resort,
to "the view which the judge takes of the justice of the case before him."

WHAT IS A ‘COMPANY’?
Before learning about the principle of lifting the corporate veil, it is expedient for us to understand
what a company is, as the principle applies only to the corporate world. The term ‘company’ is
actually a derivative of Latin term ‘companis’. If we break this term, we get ‘com’ which means
to ‘together’ and ‘panis’ which means ‘bread’. Hence, the term companis means a number of
persons who eat together. But this was the ancient approach, where people used to form groups,
only for purpose of filling their bellies. Modern day recognizes ‘company’ as group of persons,
working together for purpose of carrying out a commercial or industrial activity.
‘Company’ in India, is defined under Section 2 (20) of The Companies Act, 2013 (hereinafter
referred as “The Act”), which defines it as, a “company incorporated under this Act or under any
previous company law.” But this definition is not exhaustive. Lord Justice Lindley defines
company as “an association of many persons who contribute money or money’s worth to a
common stock and employ it in some trade or business, and who share the profit and loss (as the
case may be) arising there from. It may not be incorrect to state that, company is thus, an
association or group of persons, being in cooperation, for purpose of achieving common goals
approved by law, while these goals being with motive of personal gains and not public gains. It
has to be understood, company is a mere creature of law. It is not a real person unlike human
beings, it is rather an artificial person or juristic person. It’s existence is lawful when approved.

Company, though is run by it’s Board of Directors or even just one director, has a personality of
it’s own. It has a separate legal identity, independent of it’s owners or directors. This feature of
company was established by the Hon’ble Supreme Court of India in case of Rustom Cavasjee
Cooper vs. Union of India1 , where it was held that “a company registered under the Companies
Act is a legal person, separate and distinct from its individual members. Property of the company
is not the property of the shareholders. "This feature of an incorporated company was first found
in case Salomon v Salomon & Company Ltd 2 a sole trader, sold his manufacturing business to
Salomon & Co. Ltd. (a company he incorporated) in consideration for all but six shares in the
company, and received debentures worth 10 thousand pounds. The other subscribers to the
memorandum were his wife and five children who each took up one share. The business
subsequently collapsed, and Salomon made a claim, on the basis of the debentures held, as a
secured creditor. The liquidator argued that Salomon could not rank ahead of other creditors
because, in fact, the company and Mr. Salomon were one and the same--or alternatively, that the
company carried on business on Salomon's behalf.
On appeal, the House of Lords held that Salomon & Co. Ltd. was not a sham; that the debts of the
corporation were not the debts of Mr. Salomon because they were two separate legal entities; and
that once the artificial person has been created, "it must be treated like any other independent
person with its rights and liabilities appropriate to itself."
Likewise, in Macaura v. Northern Assurance Co. Ltd. 3the House of Lords decided that insurers
were not liable under a contract of insurance on property that was insured by the plaintiff but
owned by a company in which the plaintiff held all the fully-paid shares. The House of Lords held
that only the company as the separate legal owner of the property, and not the plaintiff, had the
required insurable interest. The plaintiff, being a shareholder, did not have any legal or beneficial
interest in that property merely because of his shareholding.

1
1970. A.I.R 564
2
(1897) A.C. 22
3
[1925] A.C. 619.
PIERCING OF CORPORATE VEIL
Piercing the veil is corporate law's most widely used doctrine to decide when a shareholder or
shareholders will be held liable for obligations of the corporation. It continues to be one of the
most litigated and most discussed doctrines in all of corporate law. Although there is near
unanimity among the commentators that the present rules neither guide good decision-making nor
produce consistent or defensible results, and there are many proposals for reform or abolition of
the present law, one sees little discernable movement in the case law toward a better approach.
Piercing the veil law exists as a check on the principle that, in general, investor shareholders should
not be held liable for the debts of their corporation beyond the value of their investment. The
modern rationale for giving individual investors limited liability emphasizes eliminating three
types of transaction costs. First are the costs of individual shareholders or creditors monitoring the
wealth position of other shareholders, and, second, the costs and other complexities of each
shareholder or creditor monitoring the risks of management actions. Third, limited shareholder
liability makes it less costly and easier for shareholders to diversify their investments. The result
of limiting these transactions costs is that limited liability both encourages investment and
facilitates the operation of equities markets. In addition, Hansman and Kraakman have
persuasively argued that limited liability is part of a broader phenomenon of asset partitioning
which serves important social interests by guaranteeing creditors that business assets will also be
protected from investors' creditors.18 However, a new consensus is emerging in the commentary
that limited liability may well not be justified in tort cases and, although with less unanimity, also
when the claim is based on statutory duties rather than common law obligations.
While traditional corporate law has not articulated different rules for a parent company in its role
as a shareholder than for individual investor shareholders, parent companies in fact present
different policy issues and their limited liability should be determined by a different analysis. The
core idea is that a parent company as a shareholder in its subsidiary companies is in quite a different
economic role and performs quite a different management function than individual investor
shareholders, including public shareholders in the parent company itself. A parent company
creates, operates and dissolves subsidiaries primarily as part of a business strategy in pursuit of the
business goals of the larger enterprise, which the parent and all the subsidiaries are pursuing
together. The parent is not an independent investor. Whatever the corporate formalities chosen,
the parent typically has very real control over the operations and decisions of the subsidiary and
the extent to which the parent exercises that control is based on business strategy for the enterprise
rather than meaningful separation of the legally independent corporate entities.
The various companies in the corporate group are really fragments that collectively conduct the
integrated enterprise under the coordination of the parent. Within corporate groups, many of the
contemporary economic efficiency justifications for limited liability do not apply, and neither
should the rules for applying that liability or determining its outer boundary decision by corporate
law to allow shareholders limited liability is a decision to allow them, as investors, to allocate
some of the risks of doing business to third parties. Piercing the veil rules are one of the traditional
ways that courts have supervised that risk allocation decision.
GROUNDS UNDER WHICH THE VEIL IS LIFTED
The corporate evil is said to be lifted when the court ignores the company and concerns itself
directly with the members or the managers. “It is impossible to ascertain the factors which operate
to break down the corporate insulation.” The matter is largely in the discretion of the courts and
will depend upon “the underlying social, economic and moral factors as they operate in and
through the corporation.” It can be said “that adherence to the Solomon principle will not be
doggedly followed where this would cause an unjust result”. But the following grounds have
become well-established for lifting of the veil of a corporate entity.
 FRAUD
The courts have been more that prepared to pierce the corporate veil when it feels that fraud is or
could be perpetrated behind the veil. The courts will not allow the Solomon principal to be used
as an engine of fraud. The two classic cases of the fraud exception are Gilford Motor Company
Ltd v. Horne4 and Jones v. Lipman.5
In the first case, Mr. Horne was an ex-employee of The Gilford motor company and his
employment contract provided that he could not solicit the customers of the company. In order to
defeat this he incorporated a limited company in his wife's name and solicited the customers of the
company. The company brought an action against him. The Court of appeal was of the view that
"the company was formed as a device, a stratagem, in order to mask the effective carrying on of
business of Mr. Horne. “In this case it was clear that the main purpose of incorporating the new
company was to perpetrate fraud.” Thus the court of appeal regarded it as a mere sham to cloak
his wrongdoings.
 GROUP ENTERPRISES
Sometimes in the case of group of enterprises the Solomon principal may not be adhered to and
the court may lift the veil in order to look at the economic realities of the group itself. In the case
of D.H.N. Food products Ltd. v. Tower Hamlets London Borough Council6 it has been said that
the courts may disregard Solomon's case whenever it is just and equitable to do so. In the above-
mentioned case the court of appeal thought that the present case where it was one suitable for
lifting the corporate veil. Here the three subsidiary companies were treated as a part of the same
economic entity or group and were entitled to compensation.
 AGENCY
In the case of Solomon v. Solomon7 Justice Vaughan Williams expressed that the company was
nothing but an agent of Solomon. "That this business was Mr. Solomon's business and no one
else's; that he chose to employ as agent a limited company; that he is bound to indemnify that agent
the company and that this agent, the company has lien on the assets." However on appeal to the

4
[1933] Ch. 935 (CA)
5
[1962] l WLR 832
6
[1976] 1 WLR 852
7
(1897) A.C. 22
house of lords it was held that a company did not automatically become an agent of the shareholder
even if it was a one man company and the other shareholders were dummies.
 TRUST
The courts may pierce the corporate veil to look at the characteristics of the shareholders. In the
case of Abbey and Planning the court lifted the corporate veil. In this case a school was run like a
company but the shares were held by trustees on educational charitable trusts. They pierced the
veil in order to look into the terms on which the trustee held the shares.
 TORT
Usually the English courts have not lifted the veil on the ground of tort it is a phenomenon not
witnessed in most common law jurisdictions apart from Canada
 ENEMY CHARACTER
In times of war the court is prepared to lift the corporate veil and determine the nature of
shareholding as it did in the Daimler case 8where germen shareholders held the shares of an
English company during the time of World War I.
 TAX
At times tax legislations warrant the lifting of the corporate veil. The courts are prepared to
disregard the separate legal personality of companies in case of tax evasions or liberal schemes of
tax avoidance without any necessary legislative authority.

8
[1916] 2 A.C. 307.
WHEN CAN BE THE VEIL LIFTED?

The doctrine, though one of the most used doctrines by Courts, is still, however, not running upon
a hard-and-fast rule. The basis for invoking such operations does not follow a laid down policy.
Howsoever, over the period of time, Courts and Legislatures throughout the globe have attempted
to narrow down scope and applicability of the doctrine under following two heads:-

 Statutory Provisions
The Companies Act, 2013 has been integrated with various provisions which tend to point out the
person who’s liable for any such improper/illegal activity. These persons are more often referred
as “officer who is in default” under Section 2(60) of the Act, which includes people such as
directors or key-managerial positions. Few instances of such frameworks are as following:-

A. Misstatement in Prospectus:-
Under Section 26 (9), Section 34 and Section 35 of the Act, it is made punishable to furnish untrue
or false statements in prospectus of the company. Through issuing prospectus, companies offer
securities for sale. Prospectus issued under Section 26 contains key notes of the company such as
details of shares and debentures, names of directors, main objects and present business of the
company. If any person attempts to furnish false or untrue statements in prospectus, he is subject
to penalty or imprisonment or both prescribed under the aforesaid sections, depending upon the
case. Each of these sections create a distinct aspect that which type of incorrect information
furnishing would make such person liable for what amount or serving term.
B. Failure to return application money:-
Under Section 39 (3) of the Act, against allotment of securities, if the stated minimum amount has
not been subscribed and the sum payable on application is not received within a period of thirty
days from the date of issue of the prospectus, then such officers in default are to be fined with an
amount of one thousand rupees for each day during which such default continues or one lakh
rupees, whichever is less.
C. Mis-description of Company’s name:-
The name of the company is most important. Usage of approved name entitles the company to
enter into contracts and make them legally binding. This name should be prior approved under
Section 4 and printed under Section 12 of the Act. Thus, if any representative of the company
collect bills or sign on behalf of the company, and enter in incorrect particulars of the company,
then such persons are to be held personally liable. Similar things happened in the case Hendon vs.
Adelman where signatory directors were held personally liable for stating company’s name on a
signed cheque as “L R Agencies Ltd” while the original name was “L & R Agencies Ltd.”
D. For investigation of ownership of company:-
Under Section 216 of the Act, the Central Government is authorized to appoint inspectors to
investigate and report on matters relating to the company, and its membership for the purpose of
determining the true persons who are financially interested in the success or failure of the
company; or who are able to control or to materially influence the policies of the company.

E. Fraudulent conduct:-
Under Section 339 of the Act, wherever in case of winding up of the company, it is found that
company’s name was being used for carrying out a fraudulent activity, the Court is empowered to
hold any such person be liable for such unlawful activities, be it director, manager, or any other
officer of the company. In the case Delhi Development Authority vs. Skipper Construction
Company9 it was stated that “where, therefore, the corporate character is employed for the purpose
of committing illegality or for defrauding others, the court would ignore the corporate character
and will look at the reality behind the corporate veil so as to enable it to pass appropriate orders to
do justice between the parties concerned.
F. Inducing persons to invest money in company:-
Under Section 36 of the Act, any person who makes false, deceptive, misleading or untrue
statements or promises to any other person or conceals relevant data from other person with a view
to induce him to enter into either of following:-
i. An agreement of acquiring, disposing, subscribing or underwriting securities.
ii. An agreement to secure profits to any of the parties from the yield of securities or by
reference to fluctuations in the value of securities.
iii. An agreement to obtain credit facilities from any bank or financial institution.
In such circumstances, the corporate personality can be ignored with a view to identify the
real culprit and make him personally liable under Section 447 of the Act accordingly.
G. Furnishing false statements:-
Under Section 448 of the Act, if in any return, report, certificate, financial statement, prospectus,
statement or other document required, any person makes false or untrue statements, or conceals
any relevant or material fact, then he is liable under Section 447 of the Act.
If any document is sent from company to any place else, content of the documents are sent on the
letter-head of the company, Now when this letter is received by any other person, he is supposed
to be under assumption that he has received the letter from the company. This “any other person”
here is persons appointed under the Act, such as Registrar of Companies (ROC). If he is furnished
any false or untrue statement, that is also an offence. Thus, in order to determine the real guilty

9
1996 A.I.R. 2005
person, who allowed such documents being released in the name of the company is to be found by
way of lifting the corporate veil
H. Repeated defaults:-
Under Section 449 of the Act, if a company or an officer of a company commits an offence
punishable either with fine or with imprisonment and this offence is being committed again within
period of 3 years, such company and officer are to pay twice the penalty of that offence in addition
to any imprisonment provided for that offence.
 Judicial Pronouncements:-
Though the Legislature has attempted to insert numerous provisions in the Act to make sure guilty
person is pointed out as veil is pierced, there are instances where Judiciary has played it’s part
better and kept a check that no guilty person, due to a mere technicality, walks free. Following are
few such scenarios where Court may without any doubt lift the corporate veil:-
A. Tax Evasion:-
It’s duty of every earning person to pay respective taxes. Company is no different than a person in
eyes of law. If anyone attempts to unlawfully avoid this duty, he is said to be committing an
offence. When strict rules are laid down for human being, why leave company? One clear
illustration was is Dinshaw Maneckjee where the founding person of 4 new private companies, Sir
Dinshaw, was enjoying huge dividend and interest income, and in order to evade his tax, he thus
found 4 sham companies. His income was credited in accounts of these companies and these
amounts were repaid to Sir Dinshaw but in form of a pretended loan. These loans entitled him to
have certain tax benefits. It was rather held that purpose of founding these new companies was
simple as means of avoiding super-tax.
B. Prevention of fraud/ improper conduct:-
It is obvious that no company can commit fraud on it’s own. There has to be a human agency
involved to commit such acts. Thus, one may make efforts to prevent upcoming frauds. Similar
thing was observed in the case Gilford Motor Co Ltd vs. Horne 10 where, Horne was appointed as
Managing Director of the company, provided he accepts the condition that he will not attempt to
entice or solicit customers of the company while he is holding the post or even afterwards.
However, shortly thereafter, he opened a company, in his wife’s name, which carried out a
competing business to that of the first company, with himself being in management. When the
matter was brought into the Court, it was held that the newfound company was mere cloak or
sham, for purpose of enabling Sir Dinshaw to commit breach of his covenant against solicitation.
C. Determination of enemy character:-
The purpose behind formation of company is self-profit. A company will not attempt to do good
towards society consciously. However, it may opt to cause damage instead. Similar things were
observed in the case Dailmer Co Ltd vs. Continental Tyres & Rubber Co Ltd. The facts were such

10
1993. Ch 935 (CA)
that a Germany based company was incorporated in England to sell tyres manufactures in
Germany. The German company had however held the bulk of shares in this English company. As
World War I broke out, the English company commenced an action to recover trade debt. The
question was brought before House of Lords which decided the case against the claimant, stating
that, company is not a real person but a legal entity, it cannot be a friend or an enemy. However,
it may assume an enemy character when persons in de facto control of it’s affairs are residents of
the enemy territory. Thus, the claim was dismissed.
It was rather held in the case Sivfracht vs. Van Udens Scheepvart 11 that, if in such scenarios
where a company is suspected to be of enemy character or is proved to be of enemy character, then
such granted monetary funds would be used as machinery to destroy the concerned State itself.
That would be monstrous and against public policy of that concerned State.
D. Liability for ultra-vires acts:-
Every company is bound to perform in compliance of it’s memorandum of association, articles of
association, and the Companies Act, 2013. Any action done outside purview of either is said to be
“ultra-vires” or improper or beyond the legitimate scope. Such operations of the company can be
subjected to penalty.
The doctrine of ultra-vires acts against companies was evolved in the case Ashbury Railway
Carriage & Iron Company Ltd v. Hector Riche 12 where a company entered into a contract for
financing construction of railway lines, and this operation was not mentioned in the memorandum.
The House of Lords held this action as ultra-vires and contract, null and void.

E. Public Interest/Public Policy

Where the conduct of the company is in conflict with public interest or public policies, Courts are
empowered to lift the veil and personally hold such persons liable who are guilty of the act. To
protect public policy is a just ground for lifting the corporate personality. One such scenario
is Jyoti Limited vs. Kanwaljit Kaur Bhasin & Anr 13where it was held that corporate veil maybe
ignored if representatives of the company commit contempt of the Court so punishment can be
inflicted upon.
E. Agency companies:-
Where it is expedient to identify the principal and agent concerning an improper action performed
by the agent, the corporate veil maybe neglected. Such as in the case of Bharat Steel Tubes Ltd
vs IFCI14 where it was held that it doesn’t matter and it isn’t necessary that Government should
be holding more than 51% of the paid-up capital to be the principal. In fact, in the case New
Tiruper Area Development Corporation Ltd vs. State of Tamil Nadu15 where Government was

11
1943 A.C. 203
12
(1875) 44 L.J. Exch 185
13
1987 CriL.J . 1282
14
(2011) 11. S. C.C 385
15
A.I.R 2010 Mad 176
holding mere 17.4% of the investment funds, it was found that Area Development Corporation
was actually a public authority through the Government. It was created under a public-private
participation to build, operate and transfer water supply and sewage treatment systems.
F. Negligent activities:-
Every company law distinguishes between holding and subsidiary companies. Holding companies
under Indian company law are the companies which have right in composition of Board of
Directors, or which have more than 50% of the total share capital of the subsidiary company. For
example, Tata Sons is the holding company while Tata Motors, TCS, Tata Steel are it’s subsidiary
companies.

In cases where subsidiary companies have been found with tainted operations, Courts have power
to make holding companies liable for actions of their subsidiary companies as well for breach of
duty or negligence on their part. Such as in the case of Chandler vs Cape Plc 16where an employee
brought an action against holding company ‘Cape Plc’ for not taking proper health and safety
measures, even though employee was employed in it’s subsidiary company.
Employee was appointed in the year 1959 in the subsidiary company while he had discovered the
fact that he is suffering from asbestosis in year 2007. When he was aware of his condition it was
that the subsidiary company was no longer in existence, thus, he brought action against the holding
company, which was still in existence. This matter was held to be maintainable. Rather, holding
company was held guilty and made liable as it owed duty of care towards employees. It was for
the first time where a holding company, despite the fact that it’s a legal entity separate from that
of its subsidiary, is however liable for actions of it’s subsidiary.

16
[2012] E.W.C.A Civ 525
CONCLUSIONs
The doctrine of piercing the corporate veil is not subject to any bright line tests. Courts have
struggled for years to develop and refine their analysis of these claims. However, each new action
brings a different set of facts and circumstances into the equation and a separate determination
must be made as to whether the plaintiff has adduced sufficient evidence of control and
domination, improper purpose, or use and resulting damage.
Though there aren’t strict and stern disciplines that whether or not the corporate personality can
be neglected, the doctrine is however, a very powerful weapon in hands of Judiciary to find the
needle in haystack. The company having this corporate personality acts as haystack where
directors, promoters, or other such persons are able to act in the name of the company and hide
themselves in the haystack like a needle. However, over the period of time, Judiciary around the
globe has evolved many methodologies and approaches to make sure no one takes advantage of
this shield for carrying out their immoral and tainted practices. Respective penalties and
punishments have been prescribed by Legislatures of different countries for committing different
types of illegal acts in the name of the company. Indeed it is correct to say that, though at an
immature stage, the doctrine acts as a watchdog over companies, which barks at and bites
whosoever attempts to illegally trespass the owner’s house.