ASSIGNMENT ON

LIFTING OF CORPORATE VEIL

SUBJECT: - COMPANY LAW

SUBMITED TO: SUBMITTED BY:

DR. PRAYAS DANSANA CHANDRA SEKHAR MISHRA
ASSISTANT PROFESSOR 4th SEMESTER
ROLL NO.10S22LL02

POST GRADUATION
(DEPARTMENT OF LAW)
SAMBALPUR UNIVERSITY JYOTI VIHAR, BURLA
WHAT IS A COMPANY?
The word company is defined under the Companies Act of 2013. The definition is mentioned in
section 2 (20) which states that the company means the company incorporated under this act or
any previous laws governing the companies in the country. Based on its structure, a company can
be a private company, a public company or a one-person company. The company can be limited
by shares, or guarantees or can also be an unlimited company. The concept of a separate legal
entity provides security to the owners of these companies from the liability of the companies. 1

The Companies Act, 2013 clarifies that a company is a separate entity distinct from its members.
But practically, it is an association of persons who are the beneficial owners of the company and
its corporate assets. This fiction is created by a veil termed the corporate veil.

LIFTING OF CORPORATE VEIL:

At times it may happen that the corporate personality of the company is used to commit frauds
and improper or illegal acts. Since an artificial person is not capable of doing anything illegal or
fraudulent, the façade of corporate personality might have to be removed to identify the persons
who are really guilty. This is known as ‘lifting of corporate veil’.

It refers to the situation where a shareholder is held liable for its corporation’s debts despite the
rule of limited liability and/or separate personality. The veil doctrine is invoked when
shareholders blur the distinction between the corporation and the shareholders. A company or
corporation can only act through human agents that compose it. As a result, there are two main
ways through which a company becomes liable in company or corporate law: firstly, through
direct liability (for direct infringement) and secondly through secondary liability (for acts of its
human agents acting in the course of their employment).

There are two existing theories for the lifting of the corporate veil. The first is the “alter-ego” or
other self-theory, and the other is the “instrumentality” theory.

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%20a%20company%20accepts%2C%20invites,get%20punished%20for%20the%20same.
The alter-ego theory considers if there is in distinctive nature of the boundaries between the
corporation and its shareholders.

The instrumentality theory on the other hand examines the use of a corporation by its owners in
ways that benefit the owner rather than the corporation. It is up to the court to decide on which
theory to apply or make a combination of the two doctrines.

STATUTORY PROVISIONS DEALING WITH LIFTING OF CORPORATE

VEIL OF THE COMPANIES IN INDIA

Section 5 of the Companies Act defines the individual person committing a wrong or an illegal
act to be held liable in respect of offenses as ‘officer who is in default’. This section gives a list
of officers who shall be liable to punishment or penalty under the expression ‘officer who is in
default’ which includes a managing director or a whole-time director.2

Section 45– Reduction of membership below statutory minimum: This section provides that if
the members of a company is reduced below seven in the case of a public company and below
two in the case of a private company (given in Section 12) and the company continues to carry
on the business for more than six months, while the number is so reduced, every person who
knows this fact and is a member of the company is severally liable for the debts of the company
contracted during that time.

In the case of Madan lal v. Himatlal & Co. the respondent filed suit against a private limited
company and its directors for recovery of dues. The directors resisted the suit on the ground that
at no point of time the company did carry on business with members below the legal minimum
and therefore, the directors could not be made severally liable for the debt in question. It was
held that it was for the respondent being dominus litus, to choose persons of his choice to be
sued.

Section 147- Misdescription of name: Under sub-section (4) of this section, an officer of a
company who signs any bill of exchange, hundi, promissory note, cheque wherein the name of
the company is not mentioned is the prescribed manner, such officer can be held personally liable

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to the holder of the bill of exchange, hundi etc. unless it is duly paid by the company. Such
instance was observed in the case of Hendon v. Adelman.

Section 239– Power of inspector to investigate affairs of another company in same group or
management: It provides that if it is necessary for the satisfactory completion of the task of an
inspector appointed to investigate the affairs of the company for the alleged mismanagement, or
oppressive policy towards its members, he may investigate into the affairs of another related
company in the same management or group.

Section 275- Subject to the provisions of Section 278, this section provides that no person can be
a director of more than 15 companies at a time. Section 279 provides for a punishment with fine
which may extend to Rs. 50,000 in respect of each of those companies after the first twenty.

Section 299- This Section gives effect to the following recommendation of the Company Law
Committee: “It is necessary to provide that the general notice which a director is entitled to give
to the company of his interest in a particular company or firm under the proviso to sub-section
(1) of section 91-A should be given at a meeting of the directors or take reasonable steps to
secure that it is brought up and read at the next meeting of the Board after it is given. The section
applies to all public as well as private companies. Failure to comply with the requirements of this
Section will cause vacation of the office of the Director and will also subject him to penalty
under sub-section (4).

Sections 307 and 308- Section 307 applies to every director and every deemed director. Not
only the name, description and amount of shareholding of each of the persons mentioned but also
the nature and extent of interest or right in or over any shares or debentures of such person must
be shown in the register of shareholders.

Section 314- The object of this section is to prohibit a director and anyone connected with him,
holding any employment carrying remuneration of as such sum as prescribed or more under the
company unless the company approves of it by a special resolution.

Section 542- Fraudulent conduct: If in the course of the winding up of the company, it appears
that any business of the company has been carried on with intent to defraud the creditors of the
company or any other person or for any fraudulent purpose, the 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 court may direct. In Popular Bank Ltd., In re it was held that section 542
appears to make the directors liable in disregard of principles of limited liability. It leaves the
Court with discretion to make a declaration of liability, in relation to ‘all or any of the debts or
other liabilities of the company’. This section postulates a nexus between fraudulent reading or
purpose and liability of persons concerned.

WHEN CORPORATE VEIL IS LIFTED UNDER COMPANIES ACT,2013?

The Companies Act provisions allow the lifting of corporate veil under various sections for
punishing those who act fraudulently behind the cover of a company incorporated with malafide
intentions. This is called the Statutory Lifting of Corporate Veil as the rules come from the
Companies Act. Some of the major provisions are as follows3: -

1. Person In Default

If the company is in default to any provision of the Companies Act of 2013 the responsible
person for the company shall be punished with either penalty, fine, or imprisonment as the
court may deem fit or as per the provision if it specifies the punishment for the offence. The
responsible person has to be identified from case to case. In general, the whole-time director
and key managerial personnel are identified as the responsible person. In such cases, the
court will lift the corporate veil and punish the real offenders.

2. Irregularities in Prospectus

Liability for misstatements in the prospectus are defined in sections 34 and 35. Section 34
discusses the criminal liability under the act and section 35 describes the civil liability. The
company should issue the prospectus only according to the description of section 26 of the
Companies Act 2013 with only correct facts and if the section is violated, it will result in
criminal and civil liability as applicable.

3. Illegal Acceptance of Deposits from Public

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If a company accepts, invites, or allows others to give it money against the provisions as
described under section 73 and section 76 and if the company doesn't give the money back
before the deadline, the corporate veil can be lifted and the people in charge of the company
can get punished for the same. The offenders may be punished with imprisonment of up to
seven years and a fine of a minimum of twenty-five lakh rupees which can go up to two crore
rupees.

4. Fraudulently Seeking Investment

If any person issues any false, statement, promise or forecast about the company and induces
any person to invest in the company, such an act will be tried under section 447 of the
Companies Act. Section 447 of the Companies Act prescribed the punishment for fraud and
the offender can be punished with imprisonment for six months to ten years and a fine.

5. During the Investigation

If the central government has appointed inspectors to investigate any matter relating to the
company, then the inspectors have the right under section 216 to pierce through the corporate
veil and find out the true persons behind the company who are making decisions on behalf of
the company. In any such case, the corporate veil is lifted and the persons hidden behind the
veil of the company are punished for their acts

6. Fraudulent Conduct of Business

In the course of the winding up of the company, if the official liquidator, company liquidator,
creditor or contributor of the company has a belief that the company carried on the business
with an intent to defraud the creditors for any fraudulent purpose. In such a case, under
section 339 of the Companies Act, the court may order the lifting of corporate veil and
punish those who were responsible for the business carried on by the company. In such a case
the business owners will be personally liable without any limitation.

7. Furnishing False Evidence

Suppose any company furnishes false evidence under any provision of the Companies Act of
2013. In that case, the court may order the lifting of corporate veil and punish those hiding
behind the company. The offenders, for furnishing false evidence in terms of oath,
 affirmations, affidavits, or depositions, shall be punished with three to seven years of
imprisonment with a fine of up to ten lakh rupees.

JUDICIAL RULINGS RELATING TO THE LIFTING OF CORPORATE

VEIL

Apart from the above-mentioned statutory lifting of corporate veil, some case laws provide
provisions for lifting of corporate veil even in more situations. This kind of lifting based on the
case laws is called Judicial Lifting of Corporate Veil. Some of the major case scenarios are as
follows4: -

1. Evasion Of Taxes

When a company gets the title of a separate legal entity, it is treated as a separate legal person
and has to fulfil the liabilities applicable to all other legal persons. One such liability is tax
payments. Taxes have to be paid on time every year on the earnings yielded by the company
and if it fails to do so, legal action can be taken against the company. But as the company
itself cannot do much wrong, the corporate veil is lifted and the persons behind the company
are punished for the non-fulfilment of the taxes by the company.5

2. Fraud Prevention

Similar to the non-fulfilment of taxes, a company cannot commit fraud on its own. The
operators behind the company must be liable for the fraud committed by the company. It is
reiterated in various judgements that the corporate veil must be lifted to find out the offenders
and punish them in cases where a company appears to be committing fraud of any kind. The
key managerial person of the company must be responsible for such fraud.

3. Enemy Character of the Company

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 A company by default is not an enemy or a friend being a legal person but the character of
the company may turn enemy if the affairs of the company are controlled by a person
resident of an enemy state. In a case where a company of German origin in England was
being controlled by the residents of Germany, the court used the doctrine of lifting of
corporate veil and decided the matter considering who was controlling the affairs of the
company instead of the nationality of the company.

4. Ultra Vires Acts

A company registered under the Companies Act needs to fulfil the compliances as mentioned
under the Memorandum of Association, Articles of Association and the Companies Act. The
operations of the company are also properly defined and anything it performs beyond that
limitation is called the ultra vires act and for that matter, the penalty is levied by the
responsible person of the company under the doctrine of the lifting of corporate veil.
Fraudulent Conduct of Business Furnishing False.

5. Public Policy

If the acts of a company go against the public interest then the corporate veil can be lifted and
the penalties can be inflicted upon the person representing the company. In Jyoti Limited vs.
Kanwaljit Kaur Bhasin and ANR., the representatives of the company were held liable for
contempt of court.

JUDICIAL INTERPRETATIONS OF LIFTING OF CORPORATE VEIL OF

THE COMPANIES IN INDIA

By contrast with the limited and careful statutory directions to ‘lift the veil’ judicial inroads into
the principle of separate personality are more numerous. Besides statutory provisions for lifting
the corporate veil, courts also do lift the corporate veil to see the real state of affairs. Some cases
where the courts did lift the veil are as follows:

Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd -This is an
instance of determination of the enemy character of a company. In this case, there was a German
company. It set up a subsidiary company in Britain and entered into a contract with Continental
Tyre and Rubber Co. (Great Britain) Ltd. for the supply of tyre . During the time of war, the
British company refused to pay as trading with an alien company is prohibited during that time.
To find out whether the company was a German or a British company, the Court lifted the veil
and found out that since the decision-making bodies, the board of directors and the general body
of shareholders were controlled by Germans, the company was a German company and not a
British company and hence it was an enemy company.

Gilford Motor Co. v. Horne– This is an instance for prevention of façade or sham. In this case,
an employee entered into an agreement that after his employment is terminated, he shall not enter
into a competing business or he should not solicit their customers by setting up his own business.
After the defendant’s service was terminated, he set up a company of the same business. His wife
and another employee were the main shareholders and the directors of the company. Although it
was in their name, he was the main controller of the business and the business solicited
customers of the previous company. The Court held that the formation of the new company was a
mere cloak or sham to enable him to breach the agreement with the plaintiff.

Re, FG (Films) Ltd– In this case the court refused to compel the board of film censors to
register a film as an English film, which was in fact produced by a powerful American film
company in the name of a company registered in England in order to avoid certain technical
difficulties. The English company was created with a nominal capital of 100 pounds only,
consisting of 100 shares of which 90 were held by the American president of the company. The
Court held that the real producer was the American company and that it would be a sham to hold
that the American company and American president were merely agents of the English company
for producing the film.

Jones v. Lipman– In this case, the seller of a piece of land sought to evade the specific
performance of a contract for the sale of the land by conveying the land to a company which he
formed for the purpose and thus he attempted to avoid completing the sale of his house to the
plaintiff. Russel J. describing the company as a “devise and a sham, a mask which he holds
before his face and attempt to avoid recognition by the eye of equity” and ordered both the
defendant and his company specifically to perform the contract with the plaintiff.

CONCLUSION
The corporate veil provides security to business owners from unwarranted risks and allows them
to pursue business and contribute to the growth of the country in a bonafide manner. But when
this security is misused by some business owners with ill intentions to commit any civil or
criminal wrong, the laws do not remain silent and provide the provisions to counter the same
with the doctrine of the lifting of corporate veil. The separate legal personality of the company is
set aside and the person responsible for the day-to-day affairs of the company is punished
appropriately.6

BIBILIOGRAPHY

https://www.corpseed.com/knowledge-centre/lifting-of-corporate-veil-under-the-companies-act-
2013#:~:text=If%20a%20company%20accepts%2C%20invites,get%20punished%20for%20the
%20same.

https://lawbhoomi.com/lifting-of-corporate-veil-of-the-companies-in-india/

https://www.vedantu.com/commerce/corporate-veil-theory

https://corpbiz.io/learning/what-is-lifting-of-corporate-veil-under-companies-act-2013/

https://blog.ipleaders.in/lifting-of-corporate-veil/

6
https://www.vedantu.com/commerce/corporate-veil-theory