DOCTRINE OF SEPARATE LEGAL PERSONALITY

A research submission submitted in fulfilment for the course (Corporate Law I) for
attaining the degree B.A., LL.B (Hons.) during the Academic year 2020-21.

A Submission made by Shubham Kumar

Roll-1765
B.A., LL.B (Hons.)

A Submission submitted to Ms. Nandita S. Jha

Date of Submission: 01-11-2020

Chanakya National Law University, Nyaya nagar, Mithapur Patna-800001

November, 2020

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 DECLARATION BY THE CANDIDATE

I hereby declare that the work reported in the B.A., LL.B. (Hons.) Project Report
entitle “DOCTRINE OF SEPARATE LEGAL PERSONALITY”

Submitted at Chanakya National Law University, Patna is an authentic record

of my work carried out under the supervision of Ms. Nandita S. Jha. I have not
submitted this work elsewhere for any other degree or diploma. I am fully
responsible for the contents of my Project Report.

(Signature of the Candidate)

SHUBHAM KUMAR
ROLL NO- 1765
B.A., LL.B. (Hons.), 7th SEMESTER
Chanakya National Law University, Patna

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 ACKNOWLEDGEMENT

Any project completed or done in isolation is unthinkable. This project, although prepared by
me, is a culmination of efforts of a lot of people. Firstly, I would like to thank our Professor Ms.
Nandita S. Jha for, helping me in making the project on “DOCTRINE OF SEPARATE
LEGAL PESONALITY” for her valuable suggestions towards the making of this project.

Further to that, I would also like to express my gratitude towards our seniors who did a lot of
help for the completion of this project. The contributions made by my classmates and friends are,
definitely, worth mentioning.

I would also like to thank the persons asked for help by me without whose support this project
would not have been completed.

I would like to express my gratitude towards the Almighty for obvious reasons. Moreover,
thanks to all those who helped me in any way be it words, presence, Encouragement or blessings.

SHUBHAM KUMAR

ROLL NO- 1765

B.A., LL.B. (Hons.), 7th SEMESTER

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 TABLE OF CONTENTS

SERIAL PAGE
NAME OF CHAPTERS
NO. NO.

1. OBJECTIVE OF THE STUDY 10

2. HYPOTHESIS 10

3. RESEARCH QUESTIONS 10

4. RESEARCH METHODOLOGY 10

CHAPTERISATION
1. INTRODUCTION…………….6-9
2. THEORIES OF CORPORATE
PERSONALITY……………….11-13
3. LIFTING OF CORPORATE VEIL…….14-
5. 17
4. EXCEPTIONS TO SEPARATE LEGAL
PERSONALITY…………………18-21
5. CONCLUSION…………………..22

BIBLIOGRAPHY……..23S

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 TABLE OF CASES

Salomon v. Salomon & Co Ltd……………………………………..................7, 14

Macaura v. Northern Assurance Co. Ltd………………………………………8

Lee v. Lee’s Air Farming…………………………………………................8, 15

Central Inland Water Transport Corporation Ltd. v. BrojoNath Ganguly……..14

State of U.P. v. Renusagar Power Company…………………………………15, 16

Life Insurance Corporation of India v. Escorts Ltd……………………………15

Gilford motor company ltd v. Horne……………………………………………20

Jones v. Lipman………………………………………………………………….20

Diamler Company Ltd v. Continental Tyre & Rubber Co……………………….20

Delhi Development Authority v. Skipper Construction Company (P) Ltd………20

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 1. INTRODUCTION: SEPARATE LEGAL PERSONALITY AND ITS

EVOLUTION

The concept of company, being a corporate entity and one of the most advantageous forms of
business organization, is based on various concepts- existence of a separate legal entity being the
most important one. By this term we mean that the company is an artificial person, different from
its members, i.e., it has its own individuality and, hence, for the acts done by this person, others
cannot be held liable. It is generally said that “members may come and go, but the company
remains forever”. Now, the concept of separate legal entity is based on the presumption that the
company is a totally different person in the eyes of the law, separate from its members and
owners. It can sue and be sued in its own name. This also leads to an inference that the company
can own a property in its name and can also sell one.1
The word “Company” has no technical or legal meaning. Section 2 (20) of the 2013 Act defines
the term “company” to mean “a company incorporated under the Companies Act 2013 or any
previous company law.”2
The “legal personality” of a company refers to the status bestowed upon it by the state permitting
it to act on its own name, rather than of its shareholders. The members of a company are not
privy to its contracts and they cannot be sued by third parties for the company’s default, subject
to certain exceptions. It has been found that no one theory can be uniformly applied across cases.
While jurists grapple with the analysis of these often complicated theories, it cannot be
ascertained whether judges adhere to any particular view, or even use the same theory
consistently.
The separate legal entity concept, as it applied to large joint stock companies, evolved
throughout much of the nineteenth century, and in particular, during the period between 1840
and 1880. This evolution was gradual and involved subtle changes that occurred on a number of
fronts. Common law developments included the changing nature of shares and the refinement of
the internal relationships within a company which served to separate a company from its
shareholders and thereby differentiated companies from partnerships. At the same time,
companies adapted their capital structures and the ways in which they raised capital so as to

1
Avtar Singh, Company Law 8(Eastern Book Company, Lucknow,17th edn.,2019)
2
Section 2(20) of the 2013 Act defines the term “company” to mean “a company incorporated
under the Companies Act 2013 or any previous company law.

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make themselves more attractive to investors. These practices also reflected the distinction
drawn by the investment sector between joint stock enterprises and partnerships. The separate
legal entity concept then was largely developed by the late nineteenth century insofar as it
applied to joint stock companies.
Applying to the company, three basic principles or groups of principles. First, the legal capacity
of the company is restricted or limited in its extent, both by the objects of the company and, more
basically, by the common law, to activities which are both lawful and appropriate to the general
scope of its purposes. Secondly, within the scope of its particular objects the company is
accorded legal capacity for proprietary, contractual and other purposes which is of exactly the
same nature as that possessed by natural persons of full capacity. This capacity is entirely
separate from, and not derived from or related in any way to, the individuals who ultimately
comprise the company’s membership. Thirdly, the company itself is accorded full and
independent procedural capacity both vis-a-vis its members and outsiders. From the combination
of these principles flow all the well-known practical aspects of separate legal entity. For
example, due to its separate proprietary and other capacity the company may enjoy perpetual
existence, its usefulness as an entity for accounting purposes is given a legal foundation, and the
possibility is opened that its members may limit their liability.
The company as a separate entity was firmly established in the landmark decision in Salomon v.
Salomon & Co. Ltd.3 , Salomon, 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.”

3
1897 AC 22 (HL)

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 In another case Macaura v. Northern Assurance Co. Ltd 4, the 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.

In Lee v. Lee’s Air Farming5, Mr. Lee was the only director and held all shares to a company
except one. Mr. Lee was killed in an accident whilst performing a job for the company. The wife
took out the insurance, but to be successful, Mr. Lee needed to be ‘a worker or any person who
has entered into works under a contract of service with an employer.’ The company raised the
objection that Mr. Lee could not be a worker and employer at the same time. The Privy Council
held that Lee, as a separate and distinct entity from the company which he controlled, could be
an employee of that company so that Lee’s wife could claim workers’ compensation following
her husband’s death.

However, consideration has to be given to the limitations of the separate entity principle which
completely denies the efficacy of the corporate entity as a legal person separate from its
founders, shareholders or management Judgements as early as the Salomon case have indicated
the recognition of exceptions to the principle of separate entity by the courts. Recognition of the
separate entity is possible provided there is “no fraud and no agency and if the company was a
real one and not a fiction or myth.” According to Lord Denning in Littlewoods Mail Order
Stores Ltd. v. IRC6, incorporation does not fully “cast a veil over the personality of a limited
company through which the courts cannot see. The courts can, and often do, pull off the mask.
They look to see what really lies behind.” “A corporation will be looked upon as a legal entity as
a general rule but when the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud or defend crime the law will regard the corporation as an association of
persons.”

The two significant reasons as to why exceptions to the separate entity principle exist is that
firstly, although a corporation is a legal person, it cannot always “be treated like any other

4
1925 AC 619
5
1960 UKPC 33
6
1969 1 WLR 1241

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independent person.” For example, a corporation is not capable of committing a tort or a crime
requiring proof of mens rea unless courts disregard the separate entity and determine the
intention held by the directors and/or shareholders of the corporation. Secondly, strict
recognition of the principle may lead to an unjust or misleading outcome if interested parties can
“hide” behind the shield of limited liability. Judicial discretion and also legislative action allows
the separate entity principle to be disregarded where some injustice is intended, or would result,
to a third party (either internal or external to the company) with whom the company is dealing.

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OBJECTIVES OF THE STUDY:

The researcher aims to do a critical analysis on the doctrine of separate legal personality and its
evolution with the help of analysis of case laws/acts.

HYPOTHESIS:
The Researcher presumes that incorporation does not cutoff personal liability at all times and in
all circumstances.
RESEARCH QUESTIONS
1. What is the doctrine of separate legal personality and how is it evolved?
2. How is the doctrine of separate legal personality evolved in the Saloman and Saloman
Case?
3. What are the different theories of corporate personality?
4. What are the meaning and scope of lifting of corporate veil?
5. What are the statutory exceptions to limited liability?

RESEARCH METHODOLOGY:
The researcher will be relying on Doctrinal method of research to complete the project. These
involve various primary and secondary sources of literature and insights.
METHOD OF WRITING

The method of writing followed in the course of this research paper is primarily analytical.

SOURCES OF DATA
PRIMARY SOURCES

 CASE LAWS

SECONDARY SOURCES

 BLOGS AND ARTICLES/JOURNALS.

 BOOKS
 CASE COMMENATRIES

LIMITATIONS OF THE STUDY:

 The researcher has territorial and time limitations in completing the project.

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 2. THEORIES OF CORPORATE PERSONALITY

Corporate Personality is one of the characteristic of the company under which company is said to
be a legal or artificial person. The concept of corporate personality further says that a company is
having a separate legal entity which is different from its members. The concept of Corporate
Personality was ruled out in the famous case of Solomon v. Solomon whereby it was enunciated
that a company is having a separate legal entity as distinct from its members.7
Characteristics of Corporate Personality:8
1. Separate Legal Entity

A company has a distinct legal entity and is independent of its members. The creditors of the
company can recover their money only from the company and the property of the company.
They cannot sue individual members. So, the company is not liable for the individual debts of its

members in any way. The property of the company is to be used for the benefit of the company
and not for the personal benefit of the shareholders. This means that company is a having
independent existence and is vested with a corporate personality which is distinct from the
members who compose it.

2. Limited Liability

A company being a separate person is the owner of the assets and bound by its liabilities. A
company may be a company limited by shares or a company limited by guarantee. In company
limited by shares, the liability of members is limited to the unpaid value of the shares.

3. Artificial legal person.

A company is an artificial person. Negatively speaking, it is not a natural person. So, a company
cannot act on its own and, it exists in the eyes of the law. It has to act through a board of
directors elected by shareholders.

4. Perpetual succession.

A company is a stable form of business organization. Its life does not depend upon the death,
insolvency or retirement of any or all shareholders or directors. The law creates it and law alone
can dissolve it. Members may come and go, but the company can go on forever.

7
Avtar Singh, Company Law 8(Eastern Book Company, Lucknow,17th edn.,2019)
8
Dr N.V. Paranjape, The New Company Law 48 (Central Law Agency, Allahabad,6th edn.,2014)

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5. Common Seal.

A company being an artificial person is similar to natural person and as such it cannot sign
documents for itself. It acts through natural person who are called its directors. But having a
legal personality,9 it can be bound by only those documents which bear its signature. Therefore,
the law has provided for the use of the common seal, with the name of the company engraved on
it, as a substitute for its signature. Any document bearing the common seal of the company will
be legally binding on the company.

Theories of Corporate Personality:

There are various theories of Corporate Personality which have attempted to describe the nature
and authority of it. Following are the principle theories of corporate personality:

1) Fiction Theory

Fiction Theory was propounded by Von Savigny, Salmond, Coke, Holland, etc. This theory says
that only human beings are properly be called as “persons”.

According to this theory, the corporation is having a different personality as that of its members.
The theory propounds that juristic person has only a fictitious will. According to this theory, the
legal personality of entities other than human beings is the result of a fiction10.

Gray supported this theory by saying that only human beings are capable of thinking, whereas a
corporation is a non-human entity to which we attribute will through humans who are capable of
thinking and assign them legal personality.11

2) Concession Theory

Concession theory is concerned with the sovereignty of the state. It is of the view that as the
corporation is a legal person recognised by state or law, so it is of great importance. According
to this theory, a juristic person is the creation of the state. This theory is allied to fiction theory.
The supporters of this theory are almost same. The theory simply says that the corporate bodies
are having legal personality only to the extent granted by the state. This theory is different from
fiction theory on the point that it identifies law with the state while fiction theory does not12.

9
Paton, Jurisprudence416-417 (Oxford University Press, 2004)
10
Dr Monomita Kundu Das, An Introduction to Jurisprudence: Legal Theory 96 (Central Law
Publications, 1stedn., 2012)
11
Gray, Nature & Sources of Law 52 (edn., 2, 1951)
12
N.K. Jayakumar, Lectures in Jurisprudence 250 (LexisNexis, 2ndedn., 2014)

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3) Realist Theory

Realist theory is also known as “Organic Theory”. This theory was propounded by Gierke and
Maitland was the supporter of this theory. This theory says that a corporation is having all the
characteristics just like a natural person. So, he opines that legal or juristic person is really just
like the human beings. It further says that juristic persons are not fictitious and also do not
require the recognition of the State13.

4) Group Personality Theory

This theory is also known as Institutional Theory. The exponent of this theory was Hauriou. The
theory has its basis in collective outlook. It says that individual integrates into association and
becomes part of it. Thus, it believed that every collective group has real mind, the will and power
of action. So, a corporation has the real existence and is independent of the fact that whether it is
recognised by the state or not14.

5) Symbolist Theory

This theory is also known as Bracket Theory. The theory was propounded by Rudolph Ritter von
Ihering. The theory says that the only persons who are having rights and duties are the members
of the corporation. The granting of legal personality means putting a bracket on the members so
that they can be treated as a single unit when a corporation is formed15.

It can be therefore said that the modern definitions are all but the genesis of these five theories.
Without these theories, it would have been very difficult to attribute a meaning and a definition
to the word Corporation and it would have become very vague. It is with the help of these
theories that the modern definition of corporation implies that it is a separate legal entity, having
an identity of its own and perpetual succession. A corporation is capable of surviving beyond the
lives of those who actually are its beneficiaries.

3. LIFTING OF CORPORATE VEIL

13
Suryakant Mahadeo Gujar, Lectures on Jurisprudence 21 (Kamal Publishers,1stedn., 2015)
14
Paton, Jurisprudence416-417 (Oxford University Press, 2004)
15
B.N. Mani Tripathi, Jurisprudence –The Legal Theory, 308-309(Allahabad Law Agency 19 th
edn., 2015

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Lifting of the corporate veil is one of the disadvantages of having incorporation. An incorporated
company is clothed with a distinct personality by fiction of law. But in reality it is an association
of persons who, in a way, are the beneficial owners of the property of the body corporate. 16 A
company being an artificial person, cannot act on its own, it can only act through the natural
persons.

The theory of corporate entity of a company is still the basic principle on which the whole law of
corporations is based. But the separate personality of the company, being a statutory privilege, it
must always be used for legitimate business purposes only. Where the legal entity of a corporate
body is misused for fraudulent and dishonest purposes, the individuals concerned will not be
allowed to take shelter behind the corporate personality. In such cases, the court will break
through the corporate shell and apply the principle of “lifting or piercing the corporate veil”, ie.,
the court will look behind the corporate entity.17

In the case of Salomon v. Salomon, it was decided that “in questions of property and capacity,
of acts done and rights acquired or, liabilities assumed thereby… the personalities of the natural
persons who are the company’s corporators is to be ignored.”

The Supreme Court of India has adopted a similar approach and in some cases it has seen
through the corporate veil. Thus, In Central Inland Water Transport Corporation Ltd. v.
BrojoNath Ganguly.18 the Apex Court while considering the question whether the appellant
company was an agency or instrumentality of the State for the purpose of Article 12 of the
Constitution of India, inter-alia observed: “For the purpose of Article 12, one must necessarily
see through the corporate veil to ascertain whether behind that veil is the face of an
instrumentality or agency of the State.”

Again, in State of U.P. v. Renusagar Power Company19, the Supreme Court observed:

“The veil of corporate personality even though not lifted sometimes, is becoming more and more
transparent in modern company jurisprudence.”

16
Gallaghar v. Germania Brewing Co., (1893) 53 Minn. 214
17
Dr. N.V. Paranjape, Company Law, ( 3rdedn., Central Law Agency, 2005)
18
1986 3 SCC 156
19
AIR 1988 SC 1732

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This theory of corporate entity is indeed the basic principle on which the whole law of
corporations is based. Instances are not few in which the courts have successfully resisted the
temptation to break through the corporate veil.

In the case of Lee v. Lee’s Air Farming Ltd20, Lee incorporated a company of which he was the
managing director. In that capacity he appointed himself as a pilot of the company. While on the
business of the company he was lost in a flying accident. His widow recovered compensation
under the Workmen’s Compensation Act. “In effect the magic of corporate personality enabled
him of directors and shareholders consent to the misuse of the company’s money, they can be
prosecuted for the theft because the consent of the whole number may not be the consent of the
company.

Although, in general, the courts do not interfere and essentially go by the principles of separate
entity as laid down in the Solomon’s case and endorsed in many others, it may be in the interest
of the members in general or in public identify and punish the persons who misuse the medium
of corporate personality.

The chief advantage of incorporation from which all others follow is, of course, the separate
legal entity of the company. However, it may happen that the corporate personality of the
company is used to commit frauds or improper or illegal acts. Since an artificial person is not
capable of doing anything illegal or fraudulent, the façade of corporate personality might have to
be removed to identify the persons who are really guilty. This is known as Lifting of the
Corporate Veil.

As to when the corporate veil shall be lifted, the observations of the supreme court in Life
Insurance Corporation of India v. Escorts Ltd 21, is worth noting. While it is firmly established
ever since Salomon v. A. Saloman & Co. Limited, was decided that a company has an
independent and legal personality distinct from the individuals who are its members, it has since
been held that the corporate veil may be lifted, the corporate personality may be ignored and the
individual members recognized for who they are in certain exceptional circumstances.

Generally, and broadly speaking the corporate veil may be lifted where the statute itself
contemplates lifting the veil or a beneficent statute is sought to be evaded or where associated
companies are inextricably connected as to be, in reality, part of one concern.
20
1961 AC 12
21
1986 59 Comp. Cas 548 (SC)

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In the case of State of U.P. v. Renusagar Power Co22, the Supreme Court has referred
“Corporate veil” as a changing concept: “The concept of lifting the corporate veil is a changing
concept. The veil of corporate personality even though not lifted sometimes is becoming more
and more transparent in modern company jurisprudence. It is high time to reiterate that in the
expanding of horizon of modern jurisprudence, lifting of corporate veil is permissible, its
frontiers are unlimited. But it must depend primarily on the realities of the situation.”

Legal standards for Piercing the Corporate Veil Under statutory provisions:

 Non-compliance of requirements of incorporation (S. 464): The purpose of the

provision is to withdraw the advantages of incorporation when the conditions of
incorporation are not maintained.
 Misrepresentation in the Prospectus (Ss. 34, 35): In case of any kind of
misrepresentation in the prospectus, every director, promoter and every other person who
authorizes such issue of prospectus incurs liability towards those who subscribed for
shares on the faith of untrue statement. (Section 34).
 Failure to Return Application Money: If the company fails to receive minimum
subscription within 120 days after the date of issue of the prospectus, it must refund the
entire application money within next 10 days (Section 39). In case of any default, the
company and its officer who is in default shall be liable to a penalty, for each default, of
one thousand rupees for each day during which such default continues or one lakh rupees,
whichever is less.

 Misdescription of Name: Where the name of the company is not mentioned properly
while transacting any kind of business in the name of the company, the signatory
directors are to be held liable. (Section 12).
 Fraudulent Conduct (Section 339): While winding up of the company, it appears that
any business of the company has been carried on with the intent to defraud the creditors
of the company or any other person, liability shall be incurred if it is proved that the
business of the company has been carried on with the view to defraud the creditors.
 For Investigating the Actual Owner of the Company: Under section 216, the Central
Government may appoint one or more inspectors to investigate and report on the

22
1991 70 Comp. Cas. 127.

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 membership of any company for the purpose of determining the true persons doing the
acts on behalf of the company.
 Sections 73 and 76: provide for prohibition on acceptance of deposits from public and
acceptance of deposits from public by certain companies. Every officer of the company
who is in default is to be made punishable with imprisonment which may extend to seven
years or with fine which shall not be less than twenty-five lakh rupees but which may
extend to two crore rupees, or with both. Company is liable to fine of not less than one
crore rupees which may extend to ten crore rupees.
 Liability for ultra vires act: The Object clause in the memorandum defines the
perimeters within which the company functions. Any act not authorized by the object
clause is ultra vires for which the members/ directors are liable. Weeks v. Propert23 is an
authority on point, where the loan in question being ultra vires was held to be void and
the warranty of the directors being broken, they were held personally liable.

4. EXCEPTIONS TO THE SEPARATE LEGAL PERSONALITY

DOCTRINE

Exceptions under Statutory Provisions:

For establishing the relationship of holding and subsidiary companies:

23
1873 LR 8 CP 427.

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Where one company controls the management of the other company, the former is called the
holding company and the latter subsidiary As per Section 129 (3), Companies Act 2013 every
holding company is required to prepare, in addition to its own financial statements (Balance
Sheet, Statement of Profit & Loss etc.) a consolidated financial statement of the company and of
all the subsidiaries

For facilitating the task of an inspector appointed under Section 210 or Section 212 or
Section 213 to investigate the affairs of a company: 

If it is necessary for the satisfactory completion of the task of an inspector appointed to

investigate the affairs of a company for alleged mismanagement, fraudulent purpose or
oppressive policies towards its members, he can investigate the affairs of other related companies
under the same management or group.

For investigation of ownership of company: 

Under Section 216, the Central Government may appoint one or more inspectors to investigate
and report on the membership of any company for the purpose of determining the true persons
who are financially interested in the company and who control its policy or materially influence
it.

Misrepresentation in prospectus: 

Every director/promoter or authorized person, is liable for imprisonment for a term ranging from
six months to ten years and shall also be liable to fine which shall not be less than the amount
involved in the fraud, and it may extend to three times the amount involved in the fraud.

Mis description of name: 

Directors and other officers of the company will be personally liable for all the contracts made by
them on behalf of the company in their personal. names, e.g., acceptance of a Bill of Exchange
drawn upon a company by a director in his personal name or omitting to use the name of the
company in the prescribed manner (for example, not using the word ‘Ltd.’ as a part of the
company’s name).

Fraudulent conduct of business: 

If in the course of the winding up of company, it appears that any business of the company has
been carried on with the intention to defraud creditors of the company or any other person, the

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Tribunal, on the application of the Official Liquidator or the Company Liquidator or on an
application of any other creditor or contributory of the company may, if it thinks it proper to do
so, declare that persons who were knowingly parties to the carrying on of the business in the
manner aforesaid, shall be personally responsible without any limitation of liability for all or any
of the debts or other liabilities of the company as the Tribunal may direct. (Section 339).

Directors with unlimited liability: 

Sometimes, when the directors, through a written agreement, agree to have their liability made
unlimited, they become personally liable for all the debts of the company.

Liability of promoters for pre-incorporation contracts: 

Promoters remain liable on those contracts which are not adopted by the company after its
incorporation. They become personally liable for contracts entered into on behalf of the
company.

Exceptions under judicial Interpretation:

Protection of Revenue

In the case of Sir Dinshaw Maneckjee Petit, Re24, the assessee was a millionaire earning huge
income by way of dividend and interest. He informed four private companies and transferred his
investments to each of these companies in exchange of their shares. The dividends and interest
income received by the company was handed back to Sir Dinshaw as a pretended loan. It was
held that the company was informed by the assessee purely and simply as a means of avoiding
tax and company was nothing more than assessee himself.

Fraud

In the case of Gilford motor company ltd v. Horne25 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.
24
AIR 1927 Bom. 371
25
1933 1 CH 935

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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.

In another case, Jones v. Lipman26, a man contracted to sell his land and thereafter changed his
mind in order to avoid an order of specific performance he transferred his property to a company.
Russel Judge specifically referred to the judgments in Gilford v. Horne and held that the
company here was " a mask which (Mr.Lipman) holds before his face in an attempt to avoid
recognition by the eye of equity" he awarded specific performance both against Mr.Lipman and
the company.

Determination of the Enemy Character of a company

In the case of Diamler Company Ltd v. Continental Tyre & Rubber Co27, a company was
incorporated in London by a German company for the purpose of selling tyres manufactured in
German. Its majority shareholders were Germans. A war was declared between Germany and
England and since the majority shareholders were controlled by Germans, enemy company, the
trade debt was dismissed on the ground that such payment would amount to trading with the
enemy company.

Where the Company is a Mere Sham or a Cloak

In the case of the Delhi Development Authority v. Skipper Construction Company (P) Ltd 28, the
Supreme court held that the fact that the directors and members of his family had created several
corporate bodies did not prevent the court from treating all of them as one entity belonging to
and controlled by the director and his family if it was found that these corporate bodies were
mere cloaks and that the device of incorporation was really a ploy adopted for committing
illegalities and/or to defraud people.

Mere Agency of the holding company

The landmark judgment about when can a subsidiary be treated as an agent of the parent and,
thus, held liable was delivered in the case of Smith Stone & Knight Ltd. v Birmingham
Corporation, a local company had a decree of compulsorily acquiring a land owned by the
26
1962 1 All ER 442
27
1916 2 AC 307.
28
1996 5 SCALE 202 (SC).

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appellants, SSK. The said appellants sold this land to the BWC, its subsidiary company, and,
thus, when the local company (the respondents) wanted to acquire the said land, the appellants
said they did not have the ownership of the same. The Court realized that the said transaction
was undertaken by the agent of appellant for the benefits of its principal. The Court lifted the
corporate veil and held the parent company liable. The Court in this case laid 5 tests:

 That the profits of the subsidiary should be treated as that of holding company;
 The persons taking care of subsidiary's business should be appointed by holding
company;
 The holding-company should take care of the business of the subsidiary and decide as to
what should be done, how and when;
 The profits of the subsidiary should be as a result of skill and direction of holding
company;
 The holding company must have an effective and constant control.

5. CONCLUSION

After going through all the decisions on point, it can be seen that courts have exercised very wide
discretion to decide whether or not to pierce the veil in a particular case to impose liability upon
the members. Being mindful of the fact that the primary goal of corporate law ought to be
certainty and predictability, this has led to uncertainty and lack of predictability regarding legal

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standards for lifting of the veil. The judges can choose any theory of their choice or sometimes
even invent a theory of their own to fasten the liability on equitable grounds.

Though, it is now very clear that incorporation does not cut off personal liability at all times and
in all circumstances. “Honest enterprise, by means of companies is allowed; but the public are
protected against kitting and humbuggery”. Therefore, the sanctity of a separate corporate
identity is upheld only insofar as the entity is consonant with the underlying policies which give
it life. The Courts have at times seized upon certain facts as evidence to justify the imposition of
liability upon the shareholders

It can be therefore said that the modern definitions are all but the genesis of these five theories.
Without these theories, it would have been very difficult to attribute a meaning and a definition
to the word Corporation and it would have become very vague. It is with the help of these
theories that the modern definition of corporation implies that it is a separate legal entity, having
an identity of its own and perpetual succession. A corporation is capable of surviving beyond the
lives of those who actually are its beneficiaries.

Therefore, it is observed that although courts have time and again made references to the
different legal principles, they have often used them without much clarity or decisiveness and
there exists a wide discretion with the courts whether to lift the corporate veil in a particular case
or not.

BIBLIOGRAPHY
PRIMARY SOURCES:

1. The Companies Act, 2013

2. Companies Act 1956

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 3. Taxman’s Company Law Digest (1913-2009), 3rd Edition.

4. Singh, Avtar, Company Law, Eastern Book Company, 17th Edition, 2019.

5. Paranjape, NV, Company Law, Central Law Agency 3rd Edition, 2005.

SECONDARY SOURCES:

1. http://www.legalserviceindia.com/legal/article-20-theories-of-corporate-
personalities.html
2. http://indiacorplaw.blogspot.in/2014/09/the-indian-supreme-court-on-lifting.htm
3. http://artismc.com/index.php/blogs/view/55/221/
4. http://www.lawctopus.com/academike/corporate-veil/
5. http://www.topcafirms.com/index.php/white-paper/7067
6. https://www.owlgen.in/what-do-you-mean-by-separate-legal-entity-concept-state-the-
exceptions-to-separate-legal-entity

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