Lifting Of The Corporate Veil

Submitted by

Sivaganga.S.R

B.A. LL.B.(Hons.)(4TH Year VII th Semester)

Submitted to

Mr.Poras Raj

Reg.No: 46017210013

23rd SEPT 2020

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 Table Of Contents

SL.NO CONTENTS PAGES

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 DECLARATION

I undersigned Sivaganga.S.R student of B.A. LLB SEM- VII, hereby declare that the project is my
own work and has been carried out under the guidance and supervision of Mr.Poras of SRM
University, Sonepat, Haryana,Delhi– NCR.

This work has not been previously submitted to any other university for any purpose.

Date:23/09/2020 Name & signature of candidate :Sivaganga.S.R

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 ACKNOWLEDGEMENT

This project would not have been possible without the essential and gracious support of
Mr.Poras(Assistant Professor of Company law) from SRM University, Sonepat, Haryana, Delhi–
NCR. His willingness to motivate me contributed tremendously to my project. I also would like
to thank his for showing me some examples related to topic of this project.

Besides I would like to thank the authorities of SRM University, Sonepat, Haryana,Delhi– NCR
and faculties of Law department for providing me good environment and facilities to complete
this project.

Last but not the least, I would like to thank my family and friends for their understandings and
supports towards me for completing this project.

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 Introduction
In the eyes of law, a company is a legal person with a separate entity distinct from its members
of sheareholders. In essence it means that there is a veil or curtain separating the legal entity of
the company from its members or shareholders. Incorporation of a company by registration was
introduced in 1844 and the doctrine of limited liability of a company followed in 1855.
Subsequently in 1897 in Salomon v. Salomon & Company, the House of Lords effected these
enactments and cemented into English law the twin concepts of corporate entity and limited
liability. In that case the apex Court laid down the principle that a company is a distinct legal
person entirely different from the members of that company. This principle is referred to as the
‘veil of incorporation’.
The chief advantage of incorporation from which all others follow is the separate entity of the
company. In reality, however, the business of the legal person is always carried on by, and for
the benefit of, some individuals. 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 beneficial owners of all the
corporate property.” And what the Salomon case decides is that ‘in questions of property and
capacity, of acts done and rights acquired or, liabilities assumed thereby…the personalities of the
natural persons who are the companies corporators is to be ignored”.
This theory of corporate entity is indeed the basic principle on which the whole law of
corporations is based. Instances are not few in which the Courts have successfully resisted the
temptation to break through the corporate veil.

But the theory cannot be pushed to unnatural limits. “There are situations where the Court will
lift the veil of incorporation in order to examine the ‘realities’ which lay behind. Sometimes this
is expressly authorized by statute…and sometimes the Court will lift its own volition”.

Meaning Of Lifting of Corporate Veil

The human ingenuity however started using the veil of corporate personality blatantly as a cloak
for fraud or improper conduct. Thus it became necessary for the Courts to break through or lift
the corporate veil and look at the persons behind the company who are the real beneficiaries of
the corporate fiction.

Lifting of the corporate veil means disregarding the corporate personality and looking behind the
real person who are in the control of the company. In other words, where a fraudulent and
dishonest use is made of the legal entity, the individuals concerned will not be allowed to take
shelter behind the corporate personality. In this regards the court will break through the corporate
shell and apply the principle of what is known as “lifting or piercing through the corporate veil.”
And 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 beneficial owners of all the corporate property. In United States V.
Milwaukee Refrigerator Co., the position was summed up as follows:

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“A corporation will be looked upon as a legal entity as a general rule……but when the notion of
legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the
law will regard the corporation as an association of persons.”

In Littlewoods Mail Order Stores Ltd V. Inland Revenue Commrs, Denning observed as follows:

“The doctrine laid down in Salomon v. Salomon and Salomon Co.Ltd, has to be watched very
carefully. It has often been supposed to cast a veil over the personality of a limited liability
company through which the Courts cannot see. But, that is not true. The Courts can and often do
draw aside the veil. They can and often do, pull off the mask. They look to see what really lies
behind”.

English Law:

According to PALMER, there are five categories of cases wherein the doctrine of the lifting of
the veil can be applicable, they are:

(i) “Where companies are in a relationship of holding and subsidiary (or sub-subsidiary)
companies;

(ii) Where a shareholder has lost the privilege of limited liability and has directly liable to certain
creditors of the company on the ground that, with his knowledge, the company continued to
carry on business for six months after the number of its member was reduced below the legal
minimum;

(iii) In certain matters pertaining to law of taxes, death duties and stamps, particularly wherein
the question of the “controlling interest” is in issue;

(iv) In the law relating to exchange control; and

(v) In the law relating to trading with enemy where the test of control is adopted.”

In the leading case of Lee v. Lee’s Air Farming Ltd. It was held by Privy Council that Lee is a
separate entity from the company which was controlled by Lee, who would be an employee of
the company, so the wife of Lee can claim compensation for his death under the workmen’s
compensation act.

Another famous case wherein the court had lifted the corporate veil was in Daimler Co. Ltd. v.
Continental Tyre and Rubber Co.- this is an instance of determination of the enemy character of
a company and the court held that if the persons or agents having de facto control are residents in
an enemy country, or wherever resident is adhering to the enemy or taking instructions from the
enemy.

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Indian Law:

In Life Insurance Corporation of India v. Escorts Limited and Others, the Supreme Court laid
down two major cases wherein the corporate veil may be lifted. These are –

(i) Judicial Grounds:

The courts in India can lift the corporate veil on certain grounds on the following grounds:

(a) Fraud Improper Conduct:

One of the most common grounds for the lifting of corporate veils, in cases wherein the
shareholders of the company are indulging in fraudulent acts. In the case of Shri Ambica Mills
Ltd., Re, it was held that the corporate veil of the company can be lifted in cases of criminal acts
of fraud by officers of a company. Similarly, in the English case of VTB Capital v. Nutritek, the
court had held the directors personally liable for obtaining a loan fraudulently. Furthermore, in
the case of Delhi Development Authority v. Skipper Construction Company it was held by the
court that “where, therefore, the corporate character is employed for the purpose of committing
illegality or for defrauding others, the court would ignore the corporate character and will look at
the reality behind the corporate veil so as to enable it to pass appropriate orders to do justice
between the parties concerned”.

(b) Tax Evasion:

The corporate veil may be lifted for the purpose of preventing tax evasion. In the Vodafone case,
the court had observed that “once the transaction is shown to be fraudulent, sham, circuitous or a
device designed to defeat the interests of the shareholders, investors, parties to the contract and
also for tax evasion, the Court can always lift the corporate veil and examine the substance of the
transaction”.

(c) The company as an Agent:

The principle of vicarious liability is applicable in cases where the agent is acting for the
shareholders. The courts will determine the liability of the shareholders based on the fact of
whether the agent was acting as an agent for the shareholders or not. Thus, it is necessary to
identify the principal and agent concerning an illegal act performed by the agent, then the
corporate veil will be lifted.

(ii) Statutory Provisions:

(a) Officer in Default (Section 2 (60) of the Companies Act, 2013 (“Act”)):

This section deals with the liability of an officer in default, i.e., those individuals who are
involved in illegal or wrongful activities and are thus liable for the offences personally.
Furthermore, this section also deals with the joint or several liabilities of the members of a
company.

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(b) Fraudulent conduct (Section 339 of the Act):

Wherever in case of winding up of the company, it is found that company’s name was being used
for carrying out fraudulent activity, the courts have the power to hold any person personally
liable for such an activity. Delhi Development Authority v. Skipper Construction Company, the
court held that “where, therefore, the corporate character is employed for the purpose of
committing illegality or for defrauding others, the court would ignore the corporate character and
will look at the reality behind the corporate veil so as to enable it to pass appropriate orders to do
justice between the parties concerned”.