Critically Analysis of Lifting the Corporate Veil

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Nadeem Amin-048

Table of Contents

Comparative Study of the Doctrine:.....................................................................................4

 UK Perspective:..............................................................................................................4
 Pakistani Perspective:....................................................................................................5
Interpretation & Critical Analysis......................................................................................6
CONCLUSION:............................................................................................................... 11

Abstract:
It is established law that although if a company has no blood relatives, it is a legal
person with all the rights that come with being a natural person, including the ability to own
property, the right to sell that property, the right to enter into contracts and the right to sue. The
goal of this essay is to demonstrate how the idea that a company is a distinct legal entity is
essentially a legal fiction created by natural individuals in order to increase profits. It is
hypothesized that because of this shield, the general public may occasionally be misled on behalf
of a company by its official members because any unethical behavior on the part of a firm's
executives can be neatly hidden by the corporate veil. Therefore, a corporate organization is
nothing more than a made-up tale that has been granted legal protection through incorporation in
order to deceive the broader public.

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Nadeem Amin-048

Introduction

The concept of a juristic person, which has evolved into the idea of a unique corporate
personality, has roots that date back to the Middle Ages. According to one theory, Pope Innocent
IV accepted the idea of a distinct legal entity with rights and obligations that resembled the
privileges and powers bestowed upon a natural person, although not actually being one. More
often than not, this person was an organization of multiple individuals who were evolving into an
institution rather than a single person. The purpose of this "persona ficta" or "person in
imagination" application was to distinguish monasteries from monks in terms of their legal
existence. This served two purposes: first, it allowed monks to take vows over their own
property, and second, it prevented the monastery from being held accountable for any
wrongdoing.
However, English Law is largely responsible for the development of the idea of a separate legal
personality as it is recognized in most common law legal systems. The term "company" used to
refer to a joint stock company prior to the Joint Stock Companies Act, 1844, which pioneered the
system of freely registering companies. These businesses were often pooled enterprises formed
to conduct significant business operations, with a sizable number of owners with the freedom to
freely transfer their shares. A joint stock corporation could either be incorporated at the moment
or not. A company that was referred to as a "corporation" had its constitution and governance
guidelines outlined in its charter and could be incorporated by Royal charter or by Act of
Parliament.
But by the late 19th century, the idea of a distinct legal entity and the corporation's external form
had fundamentally differed, and "a firm was clearly segregated from its shareholders and
acknowledged as a separate legal entity." It is also significant to note that changes made to the
Joint Stock Companies Act of 1844 and the Contracts Act of 1862 did not significantly influence
the etymology of the term "separate legal entity." We can see that the United Kingdom's Joint
Stock Companies Act of 1856 clarified that stockholders form a company on their own, in
contrast to the Companies Act of 1862, which stated explicitly that a company formed under the
Act was distinct from its members. The Companies Act of 1862 made it even clearer that
shareholders should create a business that is entirely independent of them.
In a similar vein, the Courts solidified legislative viewpoints in this area. In the Salomon v.
Salomon case, which is regarded as establishing the framework for modern corporation law, the
House of Lords upheld the well-known interpretation of this theory following the Kondoli Tea
case. Successful businessman Aaron Salomon was a master at making fleece boots. He operated
his company as a sole merchant for many years. Salomon decided to establish a limited company
when his sons expressed interest in working for him. At the time, Mr. Salomon served as
managing director and the minimum number of subscribers required by law for incorporation
was seven. The company had a total net value of £38782, which was made up of £8782 in cash,
£20000 in shares, and £10000 in debentures. The company needed to obtain more money due to
the strikes' negative financial impact, so it took out a loan from Mr. Broderip for £5000. He

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Nadeem Amin-048

received a debenture from the corporation as security, but the loan was never repaid. In response,
Mr. Broderip filed a lawsuit to recoup his loan. Finally, the business filed for bankruptcy.
Despite other debtors still being unsecured, Mr. Broderip received his security. By adding
Salomon as a defendant, the liquidator alleged that the debentures were fraudulently obtained
and hence invalid. According to the ruling, the company did not commit fraud because the
certificates were issued in accordance with the regulations for registration companies. "The
limited company was either a legitimate business or it wasn't. If it were, Mr. Salomon was not
the rightful owner of the company. If it wasn't, there would have been no one and nothing for
them to act as an agent, and it would be impossible to claim both at the same time that a firm
exists and that it does not." House further said, "The company is at law a different person
altogether from the [shareholders] ...; and even though it may be the case that following
incorporation the firm is exactly the same as it was before, the same people serve as managers,
and the same hands get the earnings, the company is not in law the agent of the [shareholders] or
trustee on their behalf. Additionally, the [shareholders], as members, are not accountable in any
way other than as specified by the Act."
The history of the English doctrine of a "separate legal entity" and the related idea of the
corporate veil can be roughly divided into three periods. The first period lasted until the
Salomon decision in 1897. The English courts experimented with the doctrine throughout this
time, using a variety of various strategies, which is why this phase is known as the
"experimentation period." The second phase started after the Second World War and lasted until
the Woolfson v. Strathclyde Regional Council case in 1978 ", The near-sacrosanct nature of
the corporate veil was re-examined by courts during this second phase, which was largely
credited to Lord Denning, one of the most well-known English jurists of the second half of the
20th century "who passionately advocated for piercing the corporate veil during the 20th century.
The beginning of the third era was signaled by the Woolfson case, in which the previous push to
re-examine these concepts was abandoned and the corporate veil theory was further established.

Comparative Study of the Doctrine:

 UK Perspective:
Section 16 (2)73 of Companies Act states, “the subscribers to the
memorandum, together with such other persons as may from time to time become
members of the company, are a body corporate by the name stated in the certificate of
incorporation”.
Lee case offered some additional insights on corporate entity doctrine following Salomon
case. The aerial top-dressing company was Lee's Air Farming Limited. All of its shares
were held by Lee through his attorney. Lee served as both the company's director and its
chief pilot. While working for the company, he perished in a plane accident. Under the
terms of the employer's workforce reimbursement indemnity, his wife filed a lawsuit. The
court decided against the argument that Lee could not continue working there while still

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Nadeem Amin-048

serving as the company's director. Lee's widow made a Privy Council appeal. A firm is a
"distinct entity apart from its members," according to the council.
A corporate entity's separate legal status has generally been upheld firmly by English
courts, who have placed restrictions on when the corporate veil might be lifted. The
separate legal personality of a registered company and the situations in which it might be
possible to ignore the separate personality of a company by "piercing the corporate veil"
or looking beyond an individual company's ownership of assets or bearing of liabilities
were the subject of two recent decisions by the Supreme Court of the United Kingdom,
VTB Capital PLC v. Nutritek International Corporation" and Prest v. Petrodel
Resources Ltd.

 Pakistani Perspective:
When it comes to how the corporate veil theory has been
mainly upheld, it appears that Pakistani courts have mostly followed the English model.
While Section 18 of the Companies Act, 2017 lists the effects of registration as being
"body corporate is capable of exercising all the functions of an incorporated company,
having perpetual succession and a common seal," the now-repealed Companies
Ordinance of 1984 recognized the significance of separate corporate identity. The
liability of the directors or of any director may, if so, be stipulated by the memorandum,
be unlimited, according to Section 98 of the 2017 Act.
In addition to the fact that our colonial past is largely responsible for the development of
company law as it is today, it is significant to mention that these rules have been
determined to be in line with Islamic principles. In the Federal Government v.
Provincial Governments case, the Federal Shariat Court (FSC) took note of this and
examined many of the crucial clauses of the Companies Ordinance of 1984 to see if
they were in line with Islamic principles. Overall, it was determined that the vast majority
of the 1984 Ordinance's parts adhered to Islamic principles. The statement that "nothing
is repugnant to Islam in the notion of "Limited Liability" and Corporate Entity" stands
out as being the most notable.
In the case of Ikram Bus Service, the Peshawar Regional Transport Authority
declined to provide route permission, claiming that such a decision should only be made
by limited companies. The court stated that "a firm is a separate juristic person distinct
from its stockholders" by citing the Salomon case. The firm neither serves as an agency
for its shareholders nor is it merely their alias.
In addition to this case, the Lahore High Court only permitted the separate legal
personality to be set aside in the presence of several questionable transactions with a
Hong Kong-based sister concern in Mian Khurshid Alam v. Shah Zaig-ur Rehman,
where the Court upheld the need to maintain a high threshold for veil piercing. After the
Pakistani company Khurshid Brother (Pvt.) Ltd. failed to repay its huge debt, the creditor
banks filed a lawsuit to recoup their losses.

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Sameer-057

Interpretation & Critical Analysis

 Case Laws:

Citation: [1986] 59 COMP. CAS. 134 (SC)

Court: Supreme Court of India
Parties: Workmen of Associated Rubber Industry Ltd.
v.
Associated Rubber Industry Ltd.
Judges: O. CHINNAPPA REDDY AND V. KHALID, JJ.

FACTS:
The appellants in this appeal are the employees of the Associated Rubber
Industry Ltd., Bhavnagar, who were given a certificate under article 133(1) of the
Constitution by the High Court of Gujarat. A few years ago, The Associated Rubber
Industry Ltd. invested Rs. 4,50,000 to buy shares of INARCO Ltd. They were receiving
yearly dividends in relation to these shares, and the amount received was recorded in the
company's profit and loss report each year. It was considered when determining the
bonus that would be given to the company's employees. Sometime during 1968, the
business transferred the INARCO Ltd. shares it owned to Aril Bhavnagar Ltd. (later
known as Aril Holdings Ltd.), a wholly owned subsidiary of the Associated Rubber
Industry Ltd. Except for the shares of INARCO Ltd. that the Associated Rubber Industry
Ltd. gave to it, Aril Holdings Ltd. lacked any further capital. Other than receiving the
dividend on the shares of INARCO Ltd., it had no other business or sources of income.
The dividend income from the shares of INARCO Ltd. was not transferred to the
Associated Rubber Industry Ltd., and as a result, it did not appear in the company's profit
and loss account, reducing the amount of surplus that could be used to give bonuses to
the company's employees. The end consequence of the exercise was that the workers
received a bonus for the year 1969 at a rate of only 4% instead of the 16% to which they
would have otherwise been entitled. We should point out that Aril Holdings Ltd.
dissolved itself in 1971 and merged with Associated Rubber Industry Ltd. The
workmen of Associated Rubber Industry Ltd. in Bhavnagar filed a labor complaint,
claiming they were entitled to a 16% bonus payment for the year 1969. They claimed that
the transfer of INARCO Ltd. shares to Aril Holdings Ltd. was nothing more than a
scheme to prevent paying the workers a larger bonus. The Associated Rubber Industry
Ltd. and Aril Holdings Ltd. were two independent companies with separate legal
existence, and as a result, the profits made by Aril Holdings Ltd. could not be treated as
profits of the Associated Rubber Industry Ltd. for the purpose of computing the gross
Sameer-057

profits made by the Associated Rubber Industry Ltd., according to the Industrial Tribunal
and then the High Court of Gujarat under article 226 of the Constitution. Furthermore, it
was determined that there was no proof that the transfer of shares to Aril Holdings Ltd.
was only an excuse to avoid paying the workmen's bonuses. It is true that in terms of the
law, Aril Holdings Ltd. and Associated Rubber Industry Ltd. were two legal entities with
separate existences. However, in our opinion, the issue was not resolved by that. In any
situation where creativity is used to get around tax and welfare laws, the court has a duty
to cut through the smokescreen and ascertain the reality. The court is not to be content
with a transaction's form and ignores its content.

ISSUES:
 Can the court lift the corporate veil in this case?
 Was this act of Rubber Industry being for the purpose of evasion of
taxes?
 Was the claim of Bhavnagar for the bonus in the year 1969 valid?

Held:
What do we discover when we examine the case's facts now? A new corporation is
formed, wholly owned by the principal company, with no assets of its own aside from
those given to it by the principal corporation, no source of revenue other than dividends
received from shares given to it by the principal corporation, and no other function other
than to lower the gross profits of the principal corporation. These truths are self-evident.
Direct evidence that the second company was established as a means of lowering the
gross earnings of the primary company for any reason cannot be proven. The reduction of
the amount to be given as a bonus to workers is one clear benefit that is achieved, and
that one can see in front of one's face. There is no need for more direct or inferential
proof because the device is so clear. It was contended that the 1971 dissolution and
merger of Aril Holdings Ltd. with the Associated Rubber Industry Ltd. demonstrated that
the company's original formation was not an avoidance tactic. But the business's
knowledgeable counsel was unable to articulate the reasons behind the formation of Aril
Holdings Ltd. and the subsequent dissolution of the corporation. After Aril Holdings Ltd.
was established, it was probably essential to wind it up and combine it with the
Associated Rubber Industry Ltd. due to unforeseen challenges that haven't been brought
to our attention.
Therefore, we are confident that the amount of dividend from INARCO Ltd. that Aril
Holdings Ltd. received should be considered when determining the Associated Rubber
Industry Ltd.'s gross profit in order to determine the rate of bonus that would be paid to
its employees. The appeal is upheld, along with the imposition of costs, and it is
determined that the employees of the Associated Rubber Industry Ltd., Bhavnagar, are
eligible for a 16% bonus for the year 1969.
Appeal Allowed.
Talal ahmed-076

 Case Laws:

Citation: [2013] UKSC 5

Court: Supreme Court
Parties: VTB Capital Plc
V
Nutritek International Corp
Judges: Lord Neuberger
Lord Mance
Lord Clarke
Lord Wilson
Lord Reed

FACTS:
The appellant, VTB Capital plc ("VTB"), is a bank authorized and regulated as
well as incorporated and registered in England. JSC VTB Bank ("VTB Moscow"), a
Moscow-based state-owned bank, owns the majority of it. The first, second, and fourth
respondents are, respectively, Marshall Capital Holdings Ltd. ("Marcap BVI"), Nutritek
International Corp. ("Nutritek"), and Mr. Konstantin Malofeev, a Russian businessman
based in Moscow who is alleged to be the ultimate owner and controller of all three. The
third respondent, Marshall Capital LLC ("Marcap Moscow"), a Russian company, has not
been served. The current action results from a Facility Agreement dated November 23,
2007 ("the Facility Agreement"), signed by VTB and Russagroprom LLC ("RAP"), a
Russian corporation, under which VTB financed RAP about US$225,050,000. The main
purpose of the advance was to allow RAP to purchase from Nutritek six Russian dairy
enterprises and three related businesses collectively known as "the dairy companies."
RAP made three interest payments (but no capital payments) before falling behind on the
loan in November 2008. VTB estimates that the security offered as collateral for the loan
is only valued between US$32 million and US$40 million.
VTB claims that false statements made by Nutritek, for which the other respondents are
jointly and severally liable, persuaded it to sign the Facility Deal and an associated
interest rate swap agreement in London. First, it is claimed that RAP and Nutritek did not
share control, and second, it is asserted that the dairy companies were valued far higher
than they actually were. According to VTB, the false statements were fraudulent. VTB
needed authority to serve any of the respondents outside of the country in order to launch
tort claims against them in England. On May 11, 2011, Master Winegarten granted
consent.
After receiving service, the first, second, and fourth respondents requested that the
service be placed aside. VTB responded by asking for permission to amend its particulars
Talal ahmed-076

of claim in order to add a contractual claim that sought to hold the respondents
accountable for violating the Facility Agreement and interest rate swap on the grounds
that RAP's corporate veil could be pierced in the circumstances and the respondents held
accountable as persons behind the borrowing.

ISSUES:
 Whether the permission granted to VTB to serve the proceedings out of
the jurisdiction should be re-instated (the Jurisdiction Appeal)?
 The question of whether VTB should be permitted to modify its initial
pled case to include a claim based on penetrating the corporate veil that
Mr. Malofeev and his affiliated companies were equally and severally
liable on the facility agreement with RAP (the Corporate Veil Appeal).

Held:
The claimant's argument was rejected by the Court of Appeal, Supreme Court,
and first instance judges alike. The latter claimed that the question of jurisdiction was not
resolved by whether or not Russian law applied. The main concerns in this case would be factual
rather than legal, thus it would not have mattered even if English law had been determined to be
the ruling law. Because England was not the proper venue for the current dispute, the Supreme
Court affirmed the decision to deny the claimant bank permission to serve the proceedings
outside of the jurisdiction.
The Supreme Court also considered the claimant's appeal's argument that the defendants'
corporate veil should be breached. It was decided that under these situations, piercing the
corporate veil would be against both law and principle. Malofeev could not be included in the
loan arrangement as a co-contracting party simply because he owned RAP and Nutritek.
Additionally, the Supreme Court unanimously rejected the asset-freezing injunction that VTB
had secured against Mr. Malofeev.
Haris-084

 Case Laws:

Citation: [2013] UKSC 34

Court: Supreme Court
Parties: Prest
V
Petrodel Resources Ltd & Others
Judges: Lord Mance
Lord Neuberger
Lord Wilson
Lord Clarke
Lord Sumption
Lady Hale

FACTS:
Although a corporation and its assets are typically seen as distinct from other
legal proceedings, there are some circumstances in which a court may "pierce the corporate veil"
by intervening and departing from custom. This common practice alludes to the capability of
locating liabilities outside of the company's distinct legal identity.
Mr. and Mrs. Prest, who were divorcing, were well-off. They had a sizable primary residence in
the UK and a second residence in Nevis. Mrs. Prest asserted that her husband's wealth was much
greater than this and that the assets held by several businesses that Mr. Prest "wholly owned and
controlled" actually belonged to him. Although one of the firms also owned the matrimonial
house, it should be noted that the Court of Appeal determined that this was held in trust for Mrs.
Prest and was not a part of the appeal to the Supreme Court.
The case was initially heard in the family court as a wife's application for ancillary relief in a
case of divorcing spouses. Moylan LJ concluded that, while there was no overarching rule that
could be used to pierce the corporate veil, this was possible under section 24(1)(a) of the
Matrimonial Causes Act. Three of the businesses with Mr. Prest as the majority shareholder
made an appeal to the Court of Appeal, where the majority criticized not only Moylan LJ's dicta
but also the custom of the family courts to pierce the corporate veil using the MCA, claiming that
the law did not permit this in the absence of misuse of the Salomon principle.
It is necessary to stop this practice, according to Patten LJ, who said that it "amounts practically
to a new system of legal norms untouched by the important principles of English property and
company law." The Supreme Court heard Mrs. Prest's appeal of the judgement.
Haris-084

ISSUES:
 The issue for the Supreme Court was how to ensure that, particularly in cases
of divorcing spouses and in single-man companies, company law could not be
used as a tool to conceal assets or avoid liability in relation to those assets,
whilst maintaining the integrity of the Salomon principle.

Held:
The Court of Appeal's ruling was unanimously overturned by the Supreme Court. Lord
Sumption delivered the deciding decision, noting that the law relating to the conditions under
which it would be acceptable for the courts to pierce the corporate veil was marked by
"inadequate reasoning." Despite this ambiguity in the law, Lord Sumption argued that the
doctrine of veil piercing required some dishonesty on the part of the company member and was
not just a tool that could be used to ensure justice in a specific case. This position was
established in Adams v. Cape Industries11, according to Sumption. His lordship continued by
noting that Trustor AB v. Smallbone (No 2), in which it was also established that dishonesty
must involve using company law as a sham or façade to conceal the true ownership of property,
had upheld this principle.
However, Lord Sumption argued that "evasion" and "concealment" should be used instead of
"sham" or "façade." He stated that in cases of culpability hiding, the corporate veil won't need to
be penetrated because, as Lord Neuberger agreed, all that would be necessary is to look behind
the veil to identify the real participants. Although he maintained that it could not be cited as
precedent in Prest since the court in that case did not need to pierce the veil, Lord Sumption said
that this was the stance taken by Lord Neuberger in VTB.
It is now clear that even where such irregularities had occurred, it would typically be possible to
apply another area of law in order to grant a remedy, in this case the application of trust
principles to ensure Mrs. Prest was entitled to a beneficial interest in the properties. Piercing the
corporate veil would only be possible when company law had been used to evade liability,
though this alone would not be enough. Prest thus established that even though it is possible for
the corporate veil to be pierced in some circumstances, it is unclear whether these circumstances
go beyond the fact that the remedy is only available as a last resort. As a result, it appears that the
decision missed the chance to clarify the law.

CONCLUSION:
In blatant instances of individual misbehavior, the courts are willing to
pierce the corporate veil. People shouldn't believe that a company's constitution or laws will give
them complete immunity from liability.
Nadeem Amin-048

Courts have also approved the employment of ethically problematic schemes as long as they do
not violate the established standard established by the Prest case, as was underlined by the
Rossendale case and notably in the context of SPVs decreasing liability to business rates. The
corporate veil is maintained and undisturbed if this requirement is met.

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