THE COMPANIES ACT,

2013

Session 2,3

By : CA Gautam Jain
Index
1. Lifting of Corporate Veil
A. Under Statutory Grounds
B. By Judicial Pronouncements
2. Case Law –  LIC v. Escorts Ltd.
Gilford Motor Co. Ltd. v. Horne
3. Basic Reading
Meaning of Corporate Veil
•A corporate veil is a legal concept that separates the acts done by the companies and
organizations from the actions of the shareholders.
•It protects the shareholders from being liable for the actions done by the company.
•By a fiction of law, a company is seen as a distinct entity separated from its members, but in
reality, it is an association of persons who in fact the beneficial owners of the company and
its corporate property.
•This fiction is created by a veil and is called the Corporate veil.
Lifting of Corporate Veil
•Lifting or piercing of corporate veil means ignoring the fact that a company is a separate
legal entity and has a separate identity (Corporate personality).
•This concept disregards the separate identity of the company and looks behind the true
owners or real persons who are in control of the company.
•Whenever and wherever a fraudulent or dishonest use is made of the legal entity, the
individuals will not be allowed to hide behind the curtain of corporate personality. The
appropriate authority will break this shell of the company and sue the individuals who have
done or committed such a crime or offence.
•This lifting of the curtain is called a Lifting of the Corporate veil.
Under Statutory Grounds
•Reduction of number of members below the statutory minimum: 
A. If at any time the minimum number of members of a company falls below two, in case of
Private company or below seven, in case of Public company; then the company can carry on the
business for a period of six months
B. While the number is so reduced, every person who is a member of the company during the
time that it still continues to carry on the business, knowing the fact that the minimum number of
members is reduced and the grace period of six months is also finished, then as the case may be,
the company and its members will be held liable and can sue an amount which they made during
those six months or else the company may be severally sued, therefore.
•Failure to refund application fee: The directors of the company shall be jointly and severally
liable to repay the money (application money) with an interest of six percent per annum from the
date of expiry of one hundred and thirtieth day if they fail to repay the application money without
interest within one hundred and twenty days when the company fails to allot shares.
Under Statutory Grounds
•Fraudulent trading: Under section339 of the Companies Act, 2013, If in the course of the
winding-up of a company, it appears that any business of the company has been carried on
with intent to defraud creditors of the company or any other persons or for any fraudulent
purpose, the Tribunal, on the application of the Official Liquidator, or the Company
Liquidator or any creditor or contributory of the company, may, if it thinks it proper so to
do, declare that any person, who is or has been a director, manager, or officer of the
company or any persons who were knowingly parties to the carrying on of the business in
the manner aforesaid shall be personally responsible, without any limitation of liability, for
all or any of the debts or other liabilities of the company as the Tribunal may direct.
Every person who had the knowledge of such fraud will be punishable with
imprisonment for a term which may extend to two years or with a fine which can extend up
to fifty thousand or with both.
Under Statutory Grounds
•For investigating company’s ownership: Under section 216 of the Companies Act, 2013,
the Central Government may appoint Inspectors to investigate and report on the
membership of the company for the purpose of determining the true individuals who are
financially interested in the company and who control its policy. Thus, the Central
Government may ignore the Corporate veil
•Misdescription of company’s name: An officer of an organization (company) who signs any
bill of trade, hundi, promissory note, check wherein the name of the organization isn’t
referenced in the recommended way, such official can be held personally liable to the holder
of the bill of trade, hundi, etc. except if it is properly paid by the company. 
Judicial Pronouncements
Though the Legislature has attempted to insert numerous provisions in the Act to make
sure guilty person is pointed out as veil is pierced, there are instances where Judiciary has
played it’s part better and kept a check that no guilty person, due to a mere technicality,
walks free. Following are few such scenarios where Court may without any doubt lift the
corporate veil:-
A. Tax Evasion:-
It’s duty of every earning person to pay respective taxes. Company is no different than a
person in eyes of law. If anyone attempts to unlawfully avoid this duty, he is said to be
committing an offence. When strict rules are laid down for human being, why leave
company? One clear illustration was is DinshawManeckjee Petit re where the founding
person of 4 new private companies, Sir Dinshaw, was enjoying huge dividend and interest
income, and in order to evade his tax, he thus found 4 sham companies. His income was
credited in accounts of these companies and these amounts were repaid to Sir Dinshaw but
in form of a pretended loan. These loans entitled him to have certain tax benefits. It was
rather held that purpose of founding these new companies was simple as means of avoiding
super-tax.
Judicial Pronouncements
B. Prevention of fraud/ improper conduct:-
•It is obvious that no company can commit fraud on it’s own. There has to be a human agency
involved to commit such acts. Thus, one may make efforts to prevent upcoming frauds.
•Similar thing was observed in the case Gilford Motor Co Ltd vs. Horne where, Horne was
appointed as Managing Director of the company, provided he accepts the condition that he will
not attempt to entice or solicit customers of the company while he is holding the post or even
afterwards.
•However, shortly thereafter, he opened a company, in his wife’s name, which carried out a
competing business to that of the first company, with himself being in management. When the
matter was brought into the Court.
•It was held that the newfound company was mere cloak or sham, for purpose of enabling Sir
Dinshaw to commit breach of his covenant against solicitation.
 Judicial Pronouncements
C. Determination of enemy character:-
The purpose behind formation of company is self-profit. A company will not attempt to do good
towards society consciously. However, it may opt to cause damage instead. Similar things were
observed in the case Dailmer Co Ltd vs. Continental Tyres & Rubber Co Ltd.
The facts were such that a Germany based company was incorporated in England to sell tyres
manufactures in Germany. The German company had however held the bulk of shares in this English
company. As World War I broke out, the English company commenced an action to recover trade debt.
The question was brought before House of Lords which decided the case against the claimant, stating
that, company is not a real person but a legal entity, it cannot be a friend or an enemy. However, it may
assume an enemy character when persons in de facto control of it’s affairs are residents of the enemy
territory. Thus, the claim was dismissed.

It was rather held in the case Sivfracht vs. Van UdensScheepvart that, if in such scenarios where a
company is suspected to be of enemy character or is proved to be of enemy character, then such
granted monetary funds would be used as machinery to destroy the concerned State itself. That
would be monstrous and against public policy of that concerned State.
 Judicial Pronouncements
D. Liability for ultra-vires acts:-
Every company is bound to perform in compliance of it’s memorandum of association, articles of association,
and the Companies Act, 2013. Any action done outside purview of either is said to be “ultra-vires” or improper
or beyond the legitimate scope. Such operations of the company can be subjected to penalty.
The doctrine of ultra-vires acts against companies was evolved in the case Ashbury Railway Carriage & Iron
Company Ltd v. Hector Riche where a company entered into a contract for financing construction of railway
lines, and this operation was not mentioned in the memorandum. The House of Lords held this action as ultra-
vires and contract, null and void.
E. Public Interest/Public Policy
Where the conduct of the company is in conflict with public interest or public policies, Courts are empowered to
lift the veil and personally hold such persons liable who are guilty of the act. To protect public policy is a just
ground for lifting the corporate personality.
One such scenario is Jyoti Limited vs. Kanwaljit Kaur Bhasin & Anr., where it was held that corporate veil
maybe ignored if representatives of the company commit contempt of the Court so punishment can be inflicted
upon.
Judicial Pronouncements
F. Agency companies:-
Where it is expedient to identify the principal and agent concerning an improper action performed by
the agent, the corporate veil maybe neglected. Such as in the case of Bharat Steel Tubes Ltd vs IFCI[14]
where it was held that it doesn’t matter and it isn’t necessary that Government should be holding more
than 51% of the paid-up capital to be the principal. In fact, in the case New Tiruper Area Development
Corporation Ltd vs. State of Tamil Nadu[15] where Government was holding mere 17.4% of the
investment funds, it was found that Area Development Corporation was actually a public authority
through the Government. It was created under a public-private participation to build, operate and
transfer water supply and sewage treatment systems.

G. Negligent activities:-
Every company law distinguishes between holding and subsidiary companies. Holding companies
under Indian company law are the companies which have right in composition of Board of Directors,
or which have more than 50% of the total share capital of the subsidiary company. For example, Tata
Sons is the holding company while Tata Motors, TCS, Tata Steel are it’s subsidiary companies.
In cases where subsidiary companies have been found with tainted operations, Courts have power to
make holding companies liable for actions of their subsidiary companies as well for breach of duty or
negligence on their part.
LIC vs Escorts
Facts of the Case
• This case dealt with a non-resident portfolio investment scheme, which existed under the erstwhile
Foreign Exchange Regulation Act, 1973 (FERA).
• The scheme allowed non-resident companies, which were owned by or in which the beneficial interest
vested in non-resident individuals of Indian nationality / origin was at least 60%, to invest in the
shares of Indian companies. Investment was allowed to the extent of 1% of the paid-up equity capital
of such Indian companies, and could not exceed a ceiling of 5%.
• Under the scheme, 13 companies, all owned by Caparo Group Limited, invested in Escorts Limited –
an Indian company. Importantly, 60% of the shares of Caparo Group Limited were held by a trust,
whose beneficiaries were Swraj Paul and members of his family (all non-resident individuals of Indian
origin).
•One of the first Indian cases that dealt with the issue of a company as an independent
juristic personality and the lifting of the veil, known almost as well as Salomon, is the ruling
of the Supreme Court in the case of Life Insurance Corporation of India v. Escorts Ltd.
LIC vs Escorts
Facts of the Case
•Investment was allowed to the extent of 1% of the paid-up equity capital of such Indian
companies, and could not exceed a ceiling of 5%. Under the scheme, 13 companies, all
owned by Caparo Group Limited, invested in Escorts Limited – an Indian company.
Importantly, 60% of the shares of Caparo Group Limited were held by a trust, whose
beneficiaries were Swraj Paul and members of his family (all non-resident individuals of
Indian origin).
 LIC vs Escorts
Ruling By court
• The Supreme Court ruled that in the facts of this case, and only for the purposes of ascertaining the ownership in
the investment, lifting of the veil would be necessary to a limited extent, i.e. to ascertain the nationality or origin of
the shareholders.
• It was not necessary to ascertain the individual identity of each of them. Merely because more than 60% of the
shares of the foreign investor companies were held by a trust of which Mr. Swraj Paul and the members of his family
were beneficiaries, could not deny the companies the facility of the scheme on the basis that the permission granted
was illegal.
• As such, the Court ignored that the identity of the shareholders may be common, thus recognising that each
company was an independent juristic entity, looking only at nationality for compliance with the requirements of the
scheme.
• The Supreme Court also took the opportunity to set out the basic conditions and principles to be applied and the
various circumstances under which the corporate veil of a company could be pierced, i.e. to cast responsibility or
liability for an act carried out by the company. 
Gilford Motor Co. Ltd. v. Horne
Facts of the Case
•Horne was formerly a managing director of the Gilford Motor Co Ltd. His employment contract stipulated
(clause 9) 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 called Mr Howard were the sole
shareholders and directors. They took over Horne’s business and continued it. Mr. Horne sent out fliers
saying, Spares and service for all models of Gilford vehicles. 170 Hornsey Lane, High gate, N. 6.
Opposite Crouch End Lane... No connection with any other firm.
•The company had no such agreement with Gilford Motor about not competing, however Gilford Motor
brought an action alleging that the company was used as an instrument of fraud to conceal Mr Horne's
illegitimate actions.
Gilford Motor Co. Ltd. v. Horne
Judgment
•Farwell J held that the covenant Mr Horne would not compete was broken. ‘I cannot help
feeling quite convinced that at any rate one of the reasons for the creation of that company
was the fear of Mr Horne that he might commit breaches of the covenant in carrying on the
business…’ But because the covenant was too wide and against public policy (restraint of
trade?) he refused to enforce it. Gilford Motor appealed.
•Lord Haworth MR granted an injunction, so that Horne was forced to stop competing
through the company. I am quite satisfied that this 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…”
 Basic Reading
The Iridium Motorola case
The significance of Iridium lies in the fact that it clarifies the law on the point as to whether a company can be punished for
crimes requiring mens rea. In this case Iridium had filed a criminal complaint against Motorola under sections 120 (Conspiracy)
and 420 (Cheating) of the Indian Penal Code based on which the magistrate in Pune started proceedings against Motorola.
Motorola then moved to the Bombay High Court seeking to quash the proceedings started by the judicial magistrate. The High
Court allowed the petition quashing the proceedings at the magistrate level giving several reasons, one of them being that a
company is incapable of having a guilty mind therefore no offence of cheating can be committed by it. Iridium, by way of appeal
approached the SC. The SC framed the following two issues for its consideration: firstly, can mens rea be attributed to the
companies for the criminal liability and secondly, what is the criminal liability for misstatements in the context of securities
offerings made to specific investors on a private basis.
Substantially, the SC was concerned about the corporate criminal liability of the company. This was done by way of principle of
attribution. This principle is invoked when the question as to whose mental element shall be attributed to the company for
foisting criminal liability, comes up. In this judgment the court ruled that the person who is in direct control and in-charge of the
affairs of the company and the degree of the control is so intense and rigorous that the company is said to act through the person,
is instrumental in attributing criminal liability to the company. The two main points on which the court gave its ruling were: first
that a company is capable of possessing the requisite mens rea and secondly that the rigid test of identification of the directing
mind of the company has to be followed in determining the requisite metal element.
Basic Reading
The Iridium Motorola case
The court had relied on the case of Tesco Ltd.5 wherein it was laid down that the people who
are specifically entrusted with the powers and duties towards the company and are
mentioned in the Memorandum of Association ("MOA"), Articles of Association ("AOA"),
named by the directors or approved of such powers in the general meetings of the company
will be held liable and their acts will be instrumental in attributing criminal liability of the
company. Iridium goes one step ahead by holding any natural person accountable and
attributing liability to the company on behalf of their actions. The only requirement is that
the person should be in charge of the affairs of the company. The court further held that non-
disclosure of proper information would be treated as mis-representation thereby
constituting the criminal offence of cheating for which the company can be held liable. The
court finally ruled that criminal liability can be attributed to the company since it is capable
of possessing the requisite men rea for commission of the offence.
THANK YOU

By : CA Gautam Jain