A STUDY ON LIFTING OF CORPORATE VEIL WITH

REFERENCE TO CASE LAWS

ASSIGNMENT OF COMPANY LAW

SUBMITTED BY: MADHHAV TYAGI. SUBMITTED TO:MS YOGEETA SHARMA

ROLL NO: 106 ASSISTANT PROFESSOR
SEMESTER VI
DATE OF SUBMISSION: 5TH NOV 2020

LR INSTITUTE OF LEGAL STUDIES, SOLAN 2020

 1. INTRODUCTION
Among various other features, a company possesses separate legal personality as laid down in
Salomon v. A. Salomon and Co. Ltd. It was held in the case of Bligh v. Brent that “the
individual members of a corporation are quite as distinct from the metaphysical body called
the corporation‟, as any others of his Majesty’s subjects are”. This principle confers on the
members of a company the benefit of not being responsible for the company’s debts except to
the extent that they are made responsible by statute or by the company’s constitution neither
do they have any proprietary interest in the property of the company.
However, it is seen that human beings are the real and ultimate beneficiaries of the corporate
advantages. By fiction of law, a corporation is a distinct entity yet in reality, it is an
association
of persons who are in fact the beneficiaries of the corporate property . But there lay
exceptions
to detect cases of fraud, improper conduct, tax evasion techniques, statutory violations or
obligations, tortuous liabilities, breach of agreements or orientation of subsidiaries into
breach of the contract for personal motives or any such reason where the situation demands,
the veil of separate legal entity is lifted or pierced. The “corporate veil” is a metaphorical
reference to the limited liability of a company, based on the prevailing rule that when
corporate formalities are observed, initial financing is adequate, and the company is not
formed to defraud creditors or other third parties, the corporate form will be respected and
shareholders will be respected and shareholders will not be liable for corporate debts and
liabilities. Therefore, when courts lift‟ or pierce‟ the corporate veil, they disregard, the
separateness of the company and hold a
shareholder responsible for the company’s actions as if it were the shareholder’s own.

2. 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.
The apex court in Delhi Development Authority v. Skipper Construction Company Pvt.
Ltd. observed as under: “The concept of corporate entity was evolved to encourage and
promote trade and commerce but not to commit illegalities or to defraud people. 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. Even if a person and his family members have created several
corporate bodies, Court can treat all of them as one entity belonging to and controlled by that
person and family if it is found that these corporate bodies are merely cloaks and the device
of incorporation was really a ploy adopted for committing illegalities and/or to defraud
people.”
In Adams v. Cape Industries, the veil was refused to be lifted on an English parent company
whose American subsidiary had been successfully sued by American litigants but which had
insufficient assets to satisfy judgement. Slade LJ had said, “...save in cases which turn on the
wording of particular statutes or contracts, the court is not free to disregard the principle of
Salomon case merely because it considers that justice so requires.” However, there have been
numerous common law exceptions to the concept of separate legal entity of a company
through judicial decisions. There have been instances of fraud by formation of a company to
avoid pre-existing contractual obligations.18 In such circumstances, the corporate veil is
lifted as done in the cases of Gilford Motor Co Ltd v Home , Jones v Lipman . In various
cases like Smith, Stone and Knight Ltd v Birmingham Corporation, the court treated a
subsidiary company as the agent of its holding company, going against the Salomon rule.
In this case, six points were said to be considered to know who is actually carrying the
business:
- Were the profits treated as the profits of the company?
- Were the persons conducting the business appointed by the parent company?
- Was the company the head and the brain of the trading venture?
- Did the company govern the adventure; decide what should be done and what capital
should be embarked on the venture?
- Did the company make the profits by its skill and direction?
- Was the company in effectual and constant control?
There are various other situations in which this doctrine may be applied. Corporate veil may
be lifted to verify if a decision taken in a company meeting was on behalf of all the members.
The veil may also be lifted to determine a company’s nationality by reference to the
nationality of the members of the company as done in Re FG Films Ltd. Keeping in mind
public interest at large, corporate veil is also lifted at times like in case of Daimler Co Ltd v
Continental Tyre & Rubber Co. (GB) Ltd. where the House of Lords decided that the
company, although it was incorporated in England, was an enemy alien as all of its
shareholders were German. In the case of Trustor AB v Smallbone, where Mr Smallbone
had transferred money from Barclays Bank to himself and a company owned by him, the
judge held that: “In my judgment the court is entitled to „pierce the corporate veil‟ and
recognise the receipt of the company as that of the individual(s) in control of it if the
company was used as a device or façade to conceal the true facts thereby avoiding or
concealing any liability of those individual(s).”

3. GROUNDS UNDER WHICH THE VEIL IS LIFTED

Depending on the situation, the veil can be peeped behind, penetrated, extended or ignored,
which is done in the most extreme cases.Prof. S. Ottolenghi characterized judicial action in
“corporate veil” cases to be of four types:
- 1. Peeping behind the veil: In this case, the veil is lifted only to know who has
control over the company, such as who are the shareholders, what is the proportion of
their holdings, and what is their inter-relationship regarding the control of the
company. After getting to know all this, the veil is pulled down and once more the
company is treated as a separate legal personality, to which special characteristics are
now attributed in consequence of that „curiosity‟; this helps to ascertain classification
of the company into a „holding company‟, a „wholly owned subsidiary‟ or an
„associated company‟ etc.
- 2. Penetrating the veil: The purpose behind this is to impose responsibility upon the
shareholders for the company's acts or to establish their direct interest in the
company‟s assets or to make them liable for the acts of the company. The courts
penetrate the veil and grasp the controlling shareholders personally.
- 3. Extending the veil: lifting the veil over one company and then pulling it down to
include another entity in the same veil. This is the approach in both „single economic
entity‟ and „factual-agency‟ arguments. In this case, the veil is extended so that it
embraces a bunch of companies. This is done when a group of legal entities conducts
a common activity, so that instead of individualistic reference, all of them can be
regarded as a single going concern, under one extended veil of incorporation.
 - 4. Ignoring the veil: This forms the most extreme form of lifting the veil. Courts
ignore the veil completely when they think that the company was not founded for
commercial or other sound grounds, but only as a means to defraud or defeat creditors
or to get out of laws. Words like cloak‟instrumentality”, sham‟, “scheme”, puppet‟ or
bubble company‟ describe a company which is not genuine

4. RECENT CASE LAWS

This doctrine has also witnessed application in the case of J.B. Exports v BSES Rajdhani
Power Ltd where sub-letting charges were not paid by the company whose shares were
acquired by another company, as both appeared to be the same entity, which was realised
after lifting the corporate veil.
In a current case of Kotak Mahindra Bank Limited v Subhiksha Trading Services
Limited , Kotak Mahindra Bank seeking winding up of Subhiksha after it failed to repay a
loan of Rs 35 crore with interest, under the provisions of Company's Act 1956, after
Subhiksha failed to prove how it suffered losses of Rs 800 crores due to the global financial
crunch, Kotak's counsel, Mr H. Karthik Seshadri, submitted that, the conduct of Mr R.
Subramanian (Managing Director of Subhiksha) required a detailed investigation by lifting
the corporate veil as there was an apprehension that he has “wilfully” transferred the
company's assets to entities such as Cash and Carry Wholesale Traders Pvt. Ltd., Custodial
Services India, Pentagon Trading Services, Shevaroy Holiday Resorts and Triad Trading
Services, which are controlled by Mr Subramanian along with a few others.
In another recent case , a company by the name, Shri Lal Mahal Ltd. (formerly known as
Shivnath Rai Harnarain (India) Company Ltd.) was incorporated by three people with the
purported object of taking over the business, assets and liabilities of another; it was “created
only with a view to defeating the award and consequently the decree under execution by the
decree holder.” The landmark case of Vodafone International Holdings BV v Union of
India was a reconciliation of the cases of Commissioner of Inland Revenue v His Grace
the Duke of Westminster and WT Ramsay v Inland Revenue Commissioner which
concluded that if the taxpayer has used colourable devices or resorted to dubious methods to
minimize tax then the revenue authorities have every right to lift the corporate veil. India's
tax authorities had raised a $2.2-billion bill on Vodafone, British mobile company after
Hutchison, a joint venture in India with Essar sold the shares of a foreign company, Cayman
Islands Co. to Vodafone, on the ground that the company had to pay capital gains tax as the
deal-making involved an Indian asset. Finally, on appeal, the Supreme Court ruled in
Vodafone's favour, interpreting law as it is today, concluding that the income-tax law does
not use the word 'indirect transfers' and, hence, cannot be interpreted to cover such transfers
of capital assets or property situated in India. In paragraph of the Vodafone case, the Chief
Justice suggested lifting of the corporate veil wherever and whenever possible. He affirmed
that “a subsidiary and its parent are totally distinct taxpayers” and that would hold good even
if a parent exercises substantial control over the affairs of its subsidiary. Further in
paragraph , he gives exceptions in cases where the decision-making is “fully subordinate” to
the holding company or if the parent company makes an “indirect transfer through abuse of
legal form and without reasonable business purpose
In another recent example where corporate veil was lifted was Richter Holdings Ltd. v The
Assistant Director of Income Tax , where High Court had directed tax authorities to lift the
corporate veil to ascertain the substance of a transaction in case there is any potential tax
evasion. Further, it was laid down that: “It may be necessary for the fact finding authority to
lift the corporate veil to look into the real nature of transaction to ascertain virtual facts. It is
also to be ascertained whether petitioner, as a majority share holder, enjoys the power by way
of interest and capital gains in the assets of the company and whether transfer of shares in the
case on hand includes indirect transfer of assets and interest in the company.

CONCLUSION
In Cotton Corporation of India Ltd. v G.C. Odusumathd the Karnataka High Court had
held that the doctrine of lifting of the corporate veil of a company as a rule is not permissible
in law unless otherwise provided in clear words of the statute or by very compelling reasons
such as where fraud is needed to be prevented or trading with enemy company is sought to be
defeated. Some of the basic instances in which the veil would be lifted are: in time of war, to
determine the enemy character of the company; in cases where the company was formed for a
fraudulent purpose; as between a holding company and its subsidiaries; and in revenue cases.
The veil can be pierced when the policies behind the presumption of corporate independence
and limited liability are outweighed by policy justifications for disregarding the corporate
form. Separate legal personality is one of the most significant features of a company which
ought not to be taken away but for exceptional cases. The veil of incorporation should be
lifted where the company is a façade concealing the true facts or where two companies were
used as a cloak for fraudulent and criminal liability. It is certainly true and established that
this doctrine’s relevance has increased today with the increase in complications with regards
to companies. It is true that company, having certain rights and duties, is a legal person‟.
However, attributing legal capacities to a company is different from treating it as having
„human characteristics. This rule of veil lifting has to be used scrupulously and efficiently,
wherever required, so that it is used in the best possible way.

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