Smith, Stone & Knight Ltd.

v
Birmingham Corp.
(1939) 4 All E.R. 116 (K.B.) at 121 (Judge
Atkinson)

Dr Dayananda Murthy C P
Smith Stone & Knight Ltd Birmingham
Paper Manufacturers Corporation
W (SSK)
O
Acquired
S
Compensation for
Birmingham Waste  Co. Ltd. Removal £3,000
(Rented Factory & offices from
SSK)
497/502 shares by SSK SSK Entitled to
S. 121 - Lands Clauses Compensation for its
disturbance?
Consolidation Act 1845 -
Enabled purchasers can give
tenants notice & thereby Claim must be made by
terminate their tenancy, & BWCL itself?
escape paying anything to Drthem.
Dayananda Murthy C P
 Judge Atkinson – Guiding Questions
Who was really carrying on the business?
 Were the profits treated as the profits of PC?
 Was PC the head & the brain of the trading
venture?
 Did PC decide what should be done & how much
investment to make in the business?
 Did PC make a profit based on its skill &
direction?
 Was PC in effectual & constant control?
 Court - Lifted the veil of incorporation to which
the waste paper business was operated.
 Court found out SSK (HC) did not transfer
ownership of waste paper business & land to B.
Co.
 Waste paper business was still the business of
PC & it was operated by SC as agent of PC
 Court held
SC was an agent & SSK was entitled to
compensation from BC
Fredrick J. Powell - PC & Sub. Corp. (1931).
Circumstances are -
1 PC owns all / most of the capital stock of SC
2 PC & SC have common directors / officers;
3 PC finances SC
4 PC subscribes to all of the capital stock of
SC/ otherwise causes its incorporation;
5 SC has grossly inadequate capital;
6 PC pays the salaries & other expenses / losses
of SC
Dr Dayananda Murthy C P
7 SC has substantially no business except with PC /
No assets except the ones conveyed to it by PC;
8 In the papers of PC/ in the statements of the
officers - SC is described as a Dept. /
Division of PC / its business / Financial
responsibility is referred to as PC’s own;
9 PC uses the property of SC as its own;
10 Directors / Executives of SC do not act
independently in the interest of SC - but take their
orders from PC in the latter’s interest;
11 Formal legal requirements of SC are not
observed.
 Hamilton v Water Whole International Corp.,
302 F. App’x 789, 793 (10th Cir. 2008). T
hese factors are
1 Whether - Dominant Corp. (PC) owns / subscribes to all the
Subservient Corp.’s (SC) stock
2 Whether PC & SC’s have common directors & officers
3 Whether PC provides financing to SC
4 Whether SC is grossly undercapitalized
5 Whether PC pays the salaries, expenses / losses of SC
6 Whether most of SC’s business is with PC /the SC’s assets
were conveyed from DC
7 Whether PC refers to SC as a division / department
8 Whether SC’s officers / directors follow PC’s directions
9 Whether the corp.’s observe the legal formalities for keeping
the entities separate.
Dr Dayananda Murthy C P
 Gower:

 “The trouble is that the attitude of the courts is

unpredictable. Each case where they have
regarded the SC as agent of PC can be matched
with another in which they have refused to do so.
 Indeed, in Ebbw Vale U.D.C. v Wales Traffic Area,
[1951] 2 K.B. 366…
 “Under ordinary rules of law, a PC & a SC, even
a 100 % SC, are distinct legal entities, & in the
absence of an agency contract between the two
Co’s one cannot be said to be agent of the other.”
Dr Dayananda Murthy C P
 Littlewoods Mail Order Stores v Inland Revenue Commissioners
(1969) 1 W.L.R. at 1254

 “The doctrine laid down in Salomon v Salomon

& Co… has to be watched very carefully.
 It has often been supposed to cast a veil over the
personality of a limited Co. through which the
courts cannot see. But that is not true.
 Courts can & often do draw aside the veil. They
can, & often do, pull off the mask. They look to
see what really lies behind. The legislature has
shown the way with group accounts & the rest…
The courts should follow suit.
Dr Dayananda Murthy C P
 DHN Food Distributors v Tower Hamlets LBC
(1976) 1 W.L.R. 852; (1976) 3 All E.R. 462, Lord Denning

D.H.N. Food D.H.N. Food

Bronze Investments Ltd Transport Ltd
Distributors Ltd

In Voluntary Liquidation
Applied to - Lands Tribunal for determination - Whether 1st & 3rd claimant Co’s
were entitled to compensation for disturbance (amounting to extinguishment of
their businesses) as a result of the compulsory acquisition by the acquiring
authority, Tower Hamlets, LBC, of premises.

Consideration - £360,000 – Transferred

Did not include any sum in
On Oct. 1, 1971 – SH’s of D.H.N. passed a respect of disturbance / any
resolution for - Voluntary WU - Followed by other claim U/S 5. Rule 6,
similar action on the part of SH’s of Transport Land Compensation Act,
on Jan. 18, 1972 & Bronze on Jan. 19, 1972. 1961? 
Until the voluntary winding up of the Co’s –
DHN owned - whole of the issued DHN owned at all times the whole of
share capital of Bronze. the issued share capital of Transport.
Directors of the 2 Co’s were at all Directors of the 2 Co’s were at all times
times the same the same.
Bronze had no employees;
Bronze had no bank account; Transport had no bank account.
Bronze carried out no trading or Vehicles owned - were used wholly &
other operations. exclusively in connection with the
Only asset of Bronze was its legal business carried on by D.H.N.
ownership of the freehold of the
reference properties.
All interest due under the mortgage did no work for any other person &
was paid by DHN carried on no other business or activity.
Rent in respect of the reference
properties which were subject to leases
was collected by agents on behalf of
DHN & paid by the agents to DHN
 LORD DENNING M.R.
 DHN took three points: That-
They had an equitable interest in the land;
Alternatively, that they had an irrevocable licence;
Court should lift the corporate veil & treat DHN as
the owners.
 And that, in one / other of these three capacities, they
were entitled to compensation for disturbance.
 This case might be called the “Three In One.” - Three
Co’s in One. - Alternatively, The “One In Three.” One
Group of Three Co’s
 DDA v Skipper Construction Co. Pvt. Ltd.
 New Horizons Ltd v UOI
 State of UP v Renusagar Power Co.;
 Institutu Chemioterapico SPA v The Commission, (1974) ECR 233 (European
Court of Justice)
 LORD DENNING
 …Especially the case when a PC owns all the shares of SC’s - So
much so that it can control every movement of SC’s… are bound
hand & foot to PC & must do just what PC says…
 See - Harold Holdsworth & Co. (Wakefield) Ltd. v Caddies
(1955) 1 W.L.R. 352. So here. (HL)
 This group is virtually the same as a partnership in which all the
3 Co’s are partners… Should not be treated separately so as to
be defeated on a technical point. They should not be deprived of
the compensation which should justly be payable for
disturbance.
 3 Co’s should, for present purposes, be treated as one, & the PC
DHN should be treated as that one. So DHN is entitled to claim
compensation accordingly…”
 A Group of Co’s can be treated as a Single Economic
Entity for Certain Purposes.
 DHN Food Distributors Ltd

 Lord Denning quoted with approval the statement in

Gower’s Co. Law that
 “There is evidence of a general tendency to
ignore the separate legal entities of various Co’s
within a group, & to look instead at the
economic entity of the whole group”.
 …This group is virtually the same as a
partnership in which all the three Co’s are
partners”. He called it a case of “Three in one”
& alternatively, as “One in three”
 Cited in DDA v Skipper Construction
Dr Dayananda Murthy C P
 INSTRUMENTALITY DOCTRINE
 Frederick Powell - First articulated this doctrine
 Involves three elements.
A Corp. must be devoid of independence & economic
substance.
There must be an - Improper Purpose / Conduct
There must be a showing that the
“instrumentalization” of the Corp. proximately
caused injury to the plaintiff.
 CIT v Sri Meenakshi Mills Ltd. AIR 1967 SC 819
 New Horizons Ltd. v Union of India (1995) 1 Comp LJ 100 (SC)
 Workmen of Associated Rubber Industries Ltd. v Associated Rubber
Industry Ltd (1986) 59 Comp Cas 134 (SC).
 DDA v Skipper Construction
 Gammon India Ltd v Commissioner of Customs 2011 AIR SCW 4175
Dr Dayananda Murthy C P
 Great Pacific Navigation (Holdings) Corporation Limited v M. V.
Tongli Yantai, 2011 Indlaw MUM 1329
 Commissioner of Income Tax v West Coast Electric Supplies
Corporation Limited, (2000])243 ITR 565; (2000) 109 TAXMAN 54
 Referring to Odhams Press Ltd. v. Cook (1941) 9 I.T.R. 92 (Suppl.)
“…It is tempting to treat what I have called the
subsidiary Co. as if it was part & parcel of the
appellants, but… Two Co’s are separate taxable
persons. The trade or business of one Co., even
though it may affect very closely the trade or
business of another, is not the same as that
other’s trade or business...”
 CIT v United Breweries (1972) Indlaw SC 252 (Mys.),
Referred in West Coast Electric Supplies Corporation Limited
 Held:
 “...The agency can be implied from the
relationship between PC & its SC –
 True test –
Whether there is - Capitalist control &
Functional control
 If PC did exercise functional control over its SC -
the existence of a SC as a separate legal entity
could not prevent the business of SC being
treated as that of PC”
 Life Insurance Corporation of India v Escorts Ltd.
(1986) 59 Comp Cases 548: 1986 (1) SCC 264

 The corporate veil may be lifted where:

 A statute itself contemplates lifting the veil, or
 Fraud / improper conduct is intended to be prevented, or
 A lasting statute / a beneficent statute is sought to be evaded /
 Where associated Co’s are inextricably connected as to be, in
reality, part of one concern.
 It is neither necessary nor desirable to enumerate the
classes where lifting the veil is permissible, since that
must necessarily depend on the
 Relevant statutory or other provisions
 Object sought to be achieved
 Impugned conduct
 Involvement of the element of the public interest
 Effect on parties who may be affected, etc.
 Life Insurance Corporation of India v Escorts Ltd.
 Individuals - No difficulty in identifying their
nationality / origin.
 Co’s & other legal personalities – What is the Nationality
/ ethnicity of such Co. / legal personality?
 Which of such non-resident Co’s / legal personalities
may then be permitted to invest in shares of Indian
Co’s?
 Answer is furnished by the scheme itself which provides
for “lifting the corporate veil” to find out if at least 60%
of shares are held by NRI Nationality / origin.
 Lifting the veil is necessary to discover the nationality /
origin of SH’s & not to find out the individual identity of
each of SH’s. The corporate veil may be lifted to that
extent only & no more”
 Life Insurance Corporation of India v Escorts Ltd.
 We do not think “lifting the veil” is necessary /
permissible beyond the essential requirement of
the FERA & the Portfolio Investment Scheme.
 …noticed that the object of the Act is to
conserve & regulate the flow of foreign
exchange & the object of the scheme is to attract
Non-Resident investors of Indian nationality /
origin to invest in shares of Indian Co’s.
 Hackbridge-Hewittic & Easun Ltd v G.E.C. Distribution
Transformers Ltd. (1992) 74 Comp Cas 543
Hackbridge-Hewittic & General Electric Co. of India Ltd
Easun Co. Ltd (HHEL) Manufactured Transformers in India -
Prior to the Aforesaid Agreements
SC in
India SC in
Hackbridge & Hewittic Electric India
Co. (HHEC) (Defendant)
RO, Surrey, England
General Electric Co.
A
G Now After – Aug. 29, 1968
England
R Known HHEC became Subsidiary of
E as
E
M
E G.E.C. Distribution Transformers Ltd.
N
Plaintiff (GECDT)
T
 HHEL to Assist GECDT
(Agreement – 1958 with amendments in 1968)
 Setting up of a plant for manufacture of power
& distribution transformers…
 To give technical assistance & advice in
connection with the working thereof…
 To communicate to GECDT - All inventions,
procedures, designs, layouts, methods of
manufacture, experiences & technical know-
how in respect of power transformers to be
made by GECDT
 To depute its engineers for investigation &
assistance to the erection, designs, layouts…
HHEC would not directly / indirectly render any
technical aid / technical assistance in relation to the
manufacture of transformers to
Any other manufacturing Co. - Firm / Person in India
nor
Would directly / indirectly embark on any scheme of
manufacture of transformers in India.

Technical service charges calculated at 5% on the total

turnover – Extended – time to time?
 Fundamental term of the contract regarding the know-how
furnished by HHEC being exclusively for HHEL’s benefit &
preserving the secrets ceased to exist after November 29, 1968 ?
 HHEL becoming SC of GEC, UK, on & from Nov. 29, 1968 - It
became disentitled to claim any royalty / dividend subsequent to
that date.
 HHEL had no obligation to pay any royalty after Nov. 29, 1968,
 Yet, it made the payment of royalty to HHEC for the period
from Nov. 29, 1968, to Jan. 31, 1970, under mistake & which
amount paid, it is entitled to recover from HHEC
 It is fully justified in declining to pay any royalty after Feb.
1, 1970, & it has no liability to pay any dividend accordingly.
 HHEC by becoming a SC of GE Co. – HHEC has been
indirectly embarking upon the business of manufacture of
transformers in India through GE Co. ?
 CASES
 Juggilal Kamlapat v Commissioner of Income-Tax
 1969 (1) SCR 988: AIR 1969 SC 932
 M/s Freewheels (India) Ltd. Vs. Dr. Veda Mitra and another
 AIR 1969 Delhi 258, 1969 39 CompCas 1 Delhi
 HC having 52% of the shares of SC - Declined to apply the
doctrine of piercing the veil.
 Spencer & Co. Ltd. v CWT,
 (1969) 39 Comp Cas 212 (Mad); AIR 1969 Mad 359 (DB)
 Fatima Tile Works and Another v Sudarasn Trading Co. Ltd.
 AIR 1992 MAD 12
 Turner Morrison and Co. Ltd. v Hungerford Investment
Trust Ltd.
 AIR 1969 Cal 238.
 CDS Financial Services (Mauritius) Ltd. v BPL
Communications Ltd.
 (2004) 121 Comp Cas 374 (Bom); (2004) 56 SCL 665
 Fatima Tile Works v Sudarsan Trading Co. Ltd.
(1992) 74 Comp Cas 423 (Mad).
Sec. 2(1)(v)(ii) - Trade & Merchandise
Marks Act, 1958 –
Requires a connection between the use of trade
mark and “some person having right either as
proprietor or as registered user to use the
mark”
(S. 2(1)(zb) of Trade Marks Act, 1999)
Use of mark belonging to HC by SC can be
treated as use by the holding Co. itself.
 Singer India Ltd v Chander Mohan Chadha & others,
(2004) 7 SCC 1
 Great Pacific Navigation (Holdings) Corporation Ltd v
M. V. Tongli Yantai, 2011 Indlaw MUM 1329 (Arrest of
a Ship?)
 CIT v West Coast Electric Supplies Corp. Ltd., [2000]
243 ITR 565
 Hackbridge-Hewittic and Easun Ltd. v G.E.C.
Distribution Transformers Ltd, 1990 Indlaw MAD 271,
[1992] 74 Comp Cas 543
 Manickavasagam Chettiar v CIT, [1964] 53 ITR 292;
 Jawahar Mills Ltd., Salem v Sha Mulchand & Co. Ltd
(In Liq. By OR, HC, Madras), AIR 1954 MAD 572
Dr Dayananda Murthy C P
 Whether PC & SC like principal & agent exist
for each other / as one mind thus as organs of
each other. 
 Its active & directing will must consequently be
sought, in the person of somebody who for some
purposes may be called an agent, but who is
really the directing mind & will of the
corporation, the very ego & centre of the
personality of the Corp.
 In reFG (Films), (1953) 1 W.L.R
 Jones v. Lipiman, (1962) 1 W.L.R
 Firestone Tyre and Rubber v Lewellin, (1957) 1 W.L.R.
464 (H.L.)
 Merchandise Transport v British Transport
Commission(1962) 2 Q.B
 Scottish Cooperative Wholesale Society v. Meyer; (1959)
A.C. 324 (H.L.)
 Littlewoods Mail Order Stores v Inland Revenue
Commissioners, (1969) 1 W.L.R. 1241 (A.C.)
 Wallersteiner v. Moir, (1974) 1 W.L.R. 991 (A.C.)
 D.H.N. Food Distributors Ltd. v. Tower Hamlets
London Borough Council. (1976) 1 W.L.R. 852 (A.C.)
Dr Dayananda Murthy C P
Great Pacific Navigation (Holdings) Corp. Ltd v M. V. Tongli Yantai, 2011
Indlaw MUM 1329
 Maritime claim - Sister concern – GPN had entered into agreement with a
shipping Co. in respect of a ship, Nasco Diamond –
 Shipping Co. was the sister concern of a China Co. who was the owner of the
Nasco Diamond ship as also the respondent ship, Tongli Yantai –
 Ship was chartered by another Co. (Da Sin) –
 Maritime claim made for arrest of the ship by way of security of an arbitral
award as an action in rem & the interpretation & applicability of the 1999
Convention replied upon by Appellant –
 Arrested ship belonged to Halycon shipping Co. & after the ship sank, Da
Sin claimed upon the appellant who in turn raised the claim upon the
shipping Co.
 Arbitration agreement between the parties was availed to resolve the dispute
 Appellant had sued the respondent for arrest of its ship & other incidental
reliefs - Maritime claim made for arrest of the ship by way of security of an
arbitral award as an action in rem & the interpretation & applicability of the
1999 Convention relied upon by the appellant –
 Ship was initially arrested upon which the respondent sought to have the
ship released from arrest –
 Notice of Motion filed by the respondent & impugned order came to be
passed releasing the ship - Appellant aggrieved -
Dr Dayananda Murthy C P
 Whether, the Trial Court erred in passing the order of release of
the respondent ship -
 Held, that an equitable / beneficial owner was a person who was
entitled to sell & alienate the shares of a ship
 Argument that the appellant could pursue arbitration only
against shipping Co. in respect of their claim against Nasco
Diamond & the involvement of the China Co. even as the
beneficial owner of the respondent ship would be out of the scope
of arbitration & would not lead to the arrest of the ship, was
wholly misconceived –
 Trial Court fell in error only with regard to the application of
the doctrine of lifting the veil of incorporation to see various
entities aside from the respondent & appreciate the ultimate
beneficial ownership of the respondent-vessel –
 Appeal allowed.
Dr Dayananda Murthy C P
 Even where two Co’s form a partnership by entering into
a JV agreement & incorporate a Co. with their SH’ing
 Third entity is a Co. with an independent legal entity
though in the nature of a partnership; it is a not a
partnership firm but a Co..
 (But if is not incorporated as a Co., it is just a partnership
& not a Co.) (1995) 1 SCC 478.
 SC’s - in Gammon India Ltd v Commissioner of Customs
2011 AIR SCW 4175,
 That a partnership formed by two Co’s but not registered as
a Co. U/T/C/A is a ‘legal entity i.e. juridical person’ does
not seem to be correct, since from the facts of the case as
appearing in the reported judgment JV was not a Co.
incorporated U/T/C/A unlike in New Horizons case.
Dr Dayananda Murthy C P
 Workmen of Associated Rubber Industries Ltd. V Associated Rubber Industry
Ltd (1986) 59 Comp Cas 134 (SC).
 Welfare legislation
 Resort was had to the principle of lifting the veil to prevent
devices to avoid welfare legislation.
 It was emphasised that regard must be had to substance & not to
the form of a transaction.
 “It is true that in law the ARIL & Aril Holdings Ltd. were distinct
legal entities having separate existence. But, in our view, that
was not an end of the matter. It is the duty of the court, in every
case where ingenuity is expended to avoid taxing & welfare
legislations, to get behind the smoke-screen & discover the true
state of affairs. The court is not to be satisfied with form & leave
alone the substance of a transaction”.
Dr Dayananda Murthy C P
 CIT v Sri Meenakshi Mills Ltd. AIR 1967 SC 819
 “It is well established that in a matter of this
description the IT authorities are entitled to pierce
the veil of corporate entity & to look at the reality of
the transaction.
 It is true that from the juristic point of view - Co. is a
legal personality entirely distinct from its members
& Co. is capable of enjoying rights &
 Being subjected to duties which are not the same as
those enjoyed / borne by its members.
 But in certain exceptional cases - Court is entitled to
lift the veil of corporate entity & to pay regard to the
economic realities behind the legal facade.
 For e.g. Court has power to disregard the corporate
entity if it is used for tax evasion / to circumvent tax
obligation.” Dr Dayananda Murthy C P
 Bank of Tokyo v. Karoon
 CA explicitly rejected the single economic unit argument, noting that "we are
concerned not with economics but with law. The distinction between the two
is, in law, fundamental and cannot here be abridged.“[1987] A.C. 45, 64 (Lord
Goff L.J.);
 Corporate veil doctrine arguably reached its nadir in Adams v Cape Industries
plc, [1990] Ch. 433 (A.C.) in which the English CA declared that the use of the
corporate structure to limit future liabilities is an inherent feature of English
Co. law and practically ruled out veil piercing in tort cases.
 Creasey v Breachwood Motors Ltd. [1992] B.C.C. 638 (Q.B.) - Pierced the veil
between two Co’s after their common owners had transferred the assets of the
first Co. to the 2nd in order to avoid an impending judgment. “Tjaskeinolen”
(Now Named “Visviet”), [1997] 2 Lloyd’s Rep. 465 (Q.B.)
 In a later case - involving very similar facts - Admiralty Court, after explicitly
endorsing the reasoning in Creasey, invalidated the sale of a vessel by one
member of a corporate group to another.
 Unfortunately, Creasey was subsequently overruled in Ord & Anorv Belhaven
Pubs [1998] B.C.C. 607 (A.C.) (Eng.).
 Although - Belhaven court did not overrule Tjaskemolen, the continued validity
of that case is now in doubt.
Dr Dayananda Murthy C P
 Beckett Investment Management Group v. Hall,
 English CA - Pierced the veil between PC & its SC’s to give effect to a
covenant not to compete in an employment contract.
 Significance of this case for the corporate veil doctrine is underscored
by a No. of statements in Lord Justice Kay’s judgment.
 Stone & Rolls v. Moore Stephens,
 Sole SH & Director of a Co. had set up a fraudulent scheme, which its
external auditors failed to detect, & swindled huge sums of money
from some banks.
 Co. subsequently went into liquidation &
 Liquidator brought claims against the auditors for professional
negligence.
 At issue was whether the culpable SH’s intentions should be
attributed to the Co., which would prevent it from pursuing its claims
against the auditors.
 Majority of HL’s set aside its separate legal personality & imputed the
SH’s fraudulent intentions to the Co..
 Co.’s claims against the auditors were hence barred.
Dr Dayananda Murthy C P
 United States v Bestfoods (1998) 524 US 51
 It is a general principle of corporate law & legal systems that a PC is
not liable for the acts of its SC,
 Court held That –
 Corporate veil can be pierced & PC can be held liable for the conduct
of its SC –
 If the corporal form is misused to accomplish certain wrongful
purposes,
 When PC is directly a participant in the wrong complained of.
 Mere ownership, parental control, management etc. of a SC is not
sufficient to pierce the status of their relationship and, to hold parent
Co. liable.
 Adams v Cape Industries Plc. (1991) 1 All ER 929 : [1990] Ch. 433,
 CA emphasized that it is appropriate to pierce the corporate veil
where special circumstances exist indicating that it is mere fagade
concealing true facts

Dr Dayananda Murthy C P