Professional Documents
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The facts of the case are that the assessee was a wealthy man enjoying large dividend
and interest income. He formed four private companies and agreed with each to hold a
block of investment as an agent for it. Income received was credited in the accounts of
the company but the company handed back the amount to him as a pretended loan.
This way he divided his income in four parts in a bid to reduce his tax liability. But it
was held “the company was formed by the assessee purely and simply as a means of
avoiding supertax and the company was nothing more than the assessee himself. It did
no business, but was created simply as a legal entity to ostensibly receive the
dividends and interests and to hand them over to the assessee as pretended loans”. The
Court decided to disregard the corporate entity as it was being used for tax evasion.
Name of the case Daimler Company v. Continental Tyre and Rubber Company
Year of the case 1916
Appellant Daimler Company
Respondent Continental Tyre and Rubber Company
Acts Involved Companies Act, 1905, Trading with the Enemy Act 1914.
There are few principles under company law that make companies registering under it
enjoy the benefits from other types of incorporations and one of the main principles is
the corporate veil nature of the company which allows the company to differentiate
itself from its shareholders. Although the corporate veil is important and provides a
lot of benefits to the company and its shareholders, sometimes it is necessary to lift
the corporate veil. In this article, the author has analyzed one of the important
decisions by the House of Lords in lifting the corporate veil in war times and listed
the concepts the case highlighted and its importance in company law.
A company has a separate legal entity and acts as an artificial person and the
shareholders cannot be asked to pay for the company’s liability beyond their pocket.
These principles were prevailing but in this judgment, the lifting of the corporate veil
is seen as an important thing to do because at the end of the day shareholders take the
decision for the company and when there is a war between two companies in which
the nationality of shareholders are in the war, then the corporate veil is lifted. After
the judgment, even today this case acts as a precedent for the lifting of the corporate
veil and it will act as a precedent in the future as well because the dynamic conditions
and situations keep on arising, and this case will act as precedent when the lifting of
corporate veil is discussed shortly.
Introduction:
Issues
1. Whether the company was an alien company and that payment of the debt
would be trading with the enemy?
2. Whether lifting the corporate veil can be used in emergencies?
Judgment
The house of lords allowed the appeal and held that though the company is a separate
artificial person from its shareholders when the shareholders or the agents who are
having the control of the company are from the enemy country, then the company will
assume an enemy character and not otherwise. The court thought that the character of
individual shareholders cannot affect the character of the company when everything is
at peace or when it is not wartime, but when it is wartime, the agents or anyone who is
taking instructions from such shareholders who is from an enemy country is important
to consider to determine the character of the company as a whole. The court very
strongly held that in this case, it is presumed that the company to have enemy
character, being the secretary holding just 1 share out of 25000 shares who is from
England and the rest being from Germany, the court held that the onus is one the
company to prove that the secretary was not taking orders from other shareholders
from an enemy country.
The court established that the action and character of the shareholders can influence
the actions of that particular company and the company can acquire enemy character
because if the shareholders who are from the enemy country take decisions for the
company.