Submission of Assignment I (Group Assignment)

to the
Panel of Examiners
1. ____________Ms. SHRUTHI PRABHAKAR___________________

2. ____________Ms. SURYA DAS___________________

in July___20____, 2022 at Room No. __211_____

for
Semester _____6th __, Course ____________BBA LLB___________________, Section __B_____, AY 2021 -
22
prepared by

Group ID __6D6___
Assignment Option ____3___
Group Members
1. ______________MOHAN KUMAR N_________________

2. _____________NIRANJ AJITH MILANA__________________

3. _____________NITHYA N__________________

4. _______________________________
tutored by
____________Ms. SHRUTHI PRABHAKAR___________________
Bengaluru 2022

Christ Nagar, Hullahalli

 Dated ____________________

TO WHOMSOEVER IT MAY CONCERN

This is to certify that this Group Assignment is a bona fide work of

_______________________________________________________________________________

______________

_______________________________________________________________________________

______________pursuing ____________________________________, Section ____________ in

Semester __________ at Christ Academy Institute of Law, Bengaluru.

This Assignment was completed under my supervision and guidance.

(Name of the Tutor)

Tutor
(Designation of the Tutor)
Christ Academy Institute of Law, Bengaluru
Email ID

NEED FOR LIFTING UP OF THE CORPORATE VEIL

The biggest advantage of opening up of a corporate firm which all others follow is for the benefit
of the separate legal entity. In the ultimate analysis, some human beings are the real beneficiaries
of the corporate advantages, “for while, 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”
- Gallaghar v. Germania Brewing Company [1893] 53 MINN. The corporate personality of the
company is used to commit frauds or improper or illegal acts.

It is obvious that an artificial person is not capable of committing a crime or any fraudulent
activities so, the façade of the corporate personality has to be avoided to find out the real person
who is supposed to be found guilty. This is known as “lifting the corporate veil”.

The theory of Lifting of the corporate veil is a changing concept. In modern Jurisprudence, even
if the veil of corporate personality is not lifted sometimes it is becoming more and more
transparent. The lifting of the corporate veil is permissible but only based primarily on the
situations.

The circumstances under which the courts may lift the corporate veil may broadly be grouped
under the following two heads:

(A) Under statutory provisions.

(B) Under judicial interpretations.

A. UNDER STATUTORY PROVISIONS - The veil of corporate personality may be lifted in

certain cases or pierced as per express provisions of the Act. In other words, the advantage of
‘distinct entity’ and ‘limited liability’ may not be allowed to be enjoyed in certain circumstances.

Section 34 & 351 talks about the mis-statements in prospectus where all the directors and every
person who authorized such issue of prospectus of the company shall be held liable to
compensate the loss or damage to every person who subscribed for shares.

Failure to return application money2 can be a punishable issue if minimum subscription, as stated
in the prospectus has not been received within 30 days of the issue of prospectus or such other
period as ordered by the SEBI, then as per Rule 11 of Companies (Prospectus and Allotment of
Securities) Rules, 2014, the application money shall be paid back within a time period of fifteen
days from the closing up of the issue and if any amount of money is not so repaid within such

1 Section 34 of the Companies Act 2013: Criminal liability for misstatements in prospectus.
Section 35 of CA 2013 provides for civil liability for misstatements in prospectus.
2 Section 39: Allotment of securities by company.
period, the directors of the company shall jointly be liable to repay that money with interest at
the rate of fifteen percent per annum.

A company shall have its name3 on promissory notes, bills of exchange and such other
documents as may be prescribed. So, when a representative of a company signs on behalf of the
company in any contract, bill of exchange, promissory note, cheque or order for money, he shall
be personally liable to the holder if the name of the company is either not mentioned, or is not
properly mentioned.

1 or more inspectors may be appointed 4 by the central government for the investigation on
finding the true members who are financially interested in the company and who influences it.

Besides the Act, directors of the company may be held personally liable under the provisions of
other statutes. For example, under the Income-tax Act, where any private company is wound-up
and if tax arrears of the company in respect of any income of any previous year cannot be
recovered, every person who was director of that company at any time during the relevant
previous year shall be jointly and severally liable for payment of tax.

B. UNDER JUDICIAL INTERPRETATIONS - It is very tough to deal with all the cases in
which courts have lifted the corporate veil. Some of the cases where the corporate veil was lifted
by judicial decisions shall be discussed to get an idea on the kind of circumstances under which
the facade of corporate personality will be removed or the persons behind the corporate entity
identified and punished.

Protection of revenue has been In Sir Dinshaw Maneckjee Petit, Re AIR 1927 Bom. 371, the
assesse was earning huge income by way of dividend and interest. He made four companies and
he transferred his investments to these companies instead 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 formed by the assesse as a mean of avoiding tax. It was created
simply as a legal entity to receive the dividends and interest ostensibly and to hand them over to
the assesse as pretended loans.

3 Section 12: Registered office of company.

4 Section 216: Investigation of ownership of company.
Where the medium of a company has been used for fraud or improper activities, courts have
lifted the veil and looked at the realities of the situation. In Gilford Motor Company v. Horne
[1933] 1 CH 935, ‘Horne’ had been employed by the company under an agreement that he shall
not solicit the customers of the company or compete with it for a period of time after leaving its
employment. After ceasing to be employed by the plaintiff, Horne formed a company which
carried on a competing business and caused the whole of its shares to be allotted to his wife and
an employee of the company, who were appointed to be its directors. It was held that since the
defendant (Horne) in fact controlled the company, its formation was a mere ‘cloak or sham’ to
enable him to break his agreement with the plaintiff. Accordingly, an injunction was issued
against him and against the company he had formed restraining them from soliciting the
plaintiff’s customers.

In Smith, Stone and Knight v. Birmingham Corpn. [1939] 4 All ER 116 (KB), it was observed,
the mere fact that a man holding all the shares in a company does not make the business carried
on by that company his business, nor does it make the company his agent for the carrying on of
the business. This proposition is just as true if the shareholder is itself a limited company. It is
also well settled that there may be such an arrangement between the shareholders and a company
as will constitute the company the shareholders’ agent for the purpose of carrying on the
business and make the business, the business of the shareholders. Thus, where an arrangement,
as aforesaid, prevails, the individual shareholders may be identified for fixing their liability.

Conclusion:

Wherever the members of a company violates any statutory provisions or carry out any non-
desirable activities under the guise of the corporate veil above the company, thereby misuse the
privilege conferred to them, the courts are entitled to look beyond the veil, and this is known as
lifting of corporate veil. But this is not a general rule and have to be applied only under
exceptional circumstances. This leaves way for the instances under which the same could be
done to be identified. Evolved through common law, the identified grounds are façade or sham,
impropriety, single economic entity argument, evasion of taxes, avoidance of welfare legislation
etc. It is worthy to note that what is important is the nature of the case. As it is an exceptional
rule, the standard of scrutiny before its application is high. In conclusion, the test is whether the
instances are crystal clear within statutes or whether the same are identified under the classical
view or would fall within the same.