Class Notes

BBIS 2073

Lifting of Corporate veil

Introduction

As the company is a separate legal entity, is has been provided with a veil, compared to
that of individuals who are managing the company.

The members of a company are liable only up to the amount they have paid or have
agreed to pay for the shares, on winding up situation.

However, the theory of corporate personality cannot be pushed to unnatural limits. If the
company or its members run the company's business opposite to law and social values,
the court will identify the company with its members.

Moreover, if court feels that veil (corporate personality) has been used for any wrongful
purpose, the court lifts the corporate veil and makes the individual liable for such acts
which they should not have done or doing in the name of the company

In some situations the court will lift the veil of corporate personality, in order to identify
the realities, to find out the actual activities of the directors of the company

The word 'limited' is omitted from the name of the company and the separate personality
of the members is ignored in this situations. The company may remains as a private firm
on concerning matter.

Circumstances to lift the corporate veil

1. Statutory provisions

If the statute of a state contain clear provision in any matter which imposes duties making
prohibition to the company, but the directors do not follow the legal provision, in this
situation the directors cannot escape from the personal liabilities. The statutory provisions
provided under the Companies Act, 2063 can be discuss as follows

a. Reduction in membership- Less than seven in public company

“If a public company carries its business with less than 7 members (S.14) for more than 6
month without making amendment to its MoA & AoA, the official of the company shall
be liable personally to pay fine of 5 to 20 thousands rupees, (S. 162) for the dealing after
the mentioned time period (S.163)

b. Mis-description of company’s name

While signing a contract if the company’s name is not properly described, then the
corporate veil can be lifted.
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BBIS 2073

c. Directors or officials commit a punishable offence or operate the company opposite to

law

If the Directors or officials commit a punishable offence or operate the company opposite
to the MoA, AoA or Unanimous Agreement, which causes the loss or damage to any of
the shareholders, creditors or to any outsiders, the directors or the officials shall
personally liable for such loss or damage, the company will not be liable. (S.163)

d. Misrepresentation in the prospectus

In case of misrepresentation, the promoters, directors and every other person responsible
in this matter can be held liable. (Derry Vs Peek)

e. Fraudulent Conduct

In case the company is carried on with intent to defraud the creditors, then the court may
lift the corporate veil.

e. Holding and subsidiary companies

A subsidiary has a distinct legal entity from the holding company other than in a few
circumstances, so if otherwise shown, the court may lift the corporate veil of the
subsidiary company.

2. Judicial Interpretation

It is very difficult to mark out and identify each and every condition where the court lift
veil of a company. Generally the court lifts the veil on reasonable grounds.

In addition if the company's officials and Directors operate its business with any bad
intention to get personal benefit, harming the shareholders, creditors, outsiders, society
and the Nation, the court will lift the corporate veil of the company

a. Fraudulent trading or Sharp Practice

Case: Gilford Motor Co. V. Horne 1933

Fact: Mr EB Horne was formerly a managing director of the Gilford Motor Co Ltd.
His employment contract stipulated not to solicit customers of the company if he were to
leave employment of Gilford Motor Co.

Mr. Horne was fired, thereafter he set up his own business and undercut Gilford Motor
Co's prices. He received legal advice saying that he was probably acting in breach of
contract. So he set up a company, JM Horne & Co Ltd, in which his wife and a friend
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BBIS 2073

called Mr Howard were the sole shareholders and directors. They took over Horne’s
business and continued it. Mr. Horne sent out fliers (leaflet) saying,

“Spares and service for all models of Gilford vehicles”. Add: 170 Hornsey Lane,
Highgate, No. 6 Opposite Crouch End Lane... “No connection with any other firm.”

Held: Company was formed as a device, a stratagem, in order to mask the effect carrying
on of a business of Mr EB Horne. The purpose of it was to enable him, under what is a
cloak or sham, to engage in business which, on consideration of the agreement.

b. Lifting the veil identifying enemy character

Case: Diamler Co. Ltd. V. Continental Tyre & Rubber Co.(GB) ltd.1916.

Fact: Except one all of Continental Tyre and Rubber Co Ltd’s shares were held by
German residents and all directors were German residents. The secretary was English.
Continental Tyre and Rubber Co Ltd supplied tyres to Diamler Co. Ltd, but Diamler
Co. Ltd was concerned that making payment might contravene a common law offence of
trading with the enemy as well as a proclamation issued under s 1(2) Trading with the
Enemy Act 1914. Daimler brought the action to determine if payment could be made,
given that it was the First World War.

Held by House of Lords: Diamler do not require to pay the due of Continental Co.
because of enemy character of Continental Co.

Case: Jones v Lipman, High Court, [1962] 1 WLR 832

Mr Lipman contracted to sell a house at 3 Fairlawn Avenue, Chiswick, Middlesex (now

Ealing W4) to Mr Jones for £5,250. He changed his mind and refused to complete. To
try and avoid a specific performance order, he conveyed it to a company formed for that
purpose alone, which he alone owned and controlled.

Held: Company is the creature of the first defendant, a device and a sham, a mask which
he holds before his face in an attempt to avoid recognition by the eye of equity

c. Group Situation

If the holding company and the subsidiary company carry the same business, they are
treated as one entity. The court treats the subsidiary company as the agent of its holding
company. Whenever holding company incorporates any subsidiary company for tax
evasion or for some other malpractices the court lifts the corporate veil.

If a group of companies involve in a same business the parent (holding) company must
prepare group accounts consolidating the balance sheets, the profit and loss account of it
and its subsidiary undertakings.
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BBIS 2073

In the case of Smith,Stone & Knight Ltd. V. Brimingham Corporation(1939) the court
treated a subsidiary company as the agent of its holding company.

Case: DHN Food Distributors Ltd v Tower Hamlets LBC, Court of Appeal, [1976] 1
WLR 852, Lord Denning MR, Goff LJ

DHN imported groceries and provision and had a cash-and-carry grocery business. Its
premises were owned by its subsidiary which was called Bronze. It had a warehouse in
Malmesbury Road, in Bow, the East End of London. Bronze’s directors were DHN’s.
Bronze had no business and the only assets were the premises, of which DHN was the
licensee. Another wholly owned subsidiary, called DHN Food Transport Ltd owned the
vehicles. In 1970 Tower Hamlets London Borough Council compulsorily acquired the
premises to build houses. As a result, DHN had to close down. Compensation was
already paid to Bronze, one and a half times the land value. DHN could only get
compensation too if it had more than a license interest. The Lands Tribunal held no
further compensation was payable.

Held: The Court of Appeal held that DHN and Bronze were part of a single economic
entity. Therefore as if DHN had owned the land itself, it was entitled to compensation for
the loss of business.