PIERCING OF CORPORATE VEIL UNDER

STATUTORY PROVISIONS ENSHRINED

UNDER THE COMPANIES ACT, 2013
The Veil of a company may be lifted in certain cases or pierced as per express provisions of
the Act. In other words, the advantages of distinct entity and limited liability may not be
allowed to be enjoyed in certain circumstances.
The Companies Act, 2013 itself provides for certain cases in which the directors or members
of the company may be held personally liable. In such cases, while the separate entity of the
company is maintained, the directors or members are held personally liable along with the
company. These cases are discussed below.
(a) Misdescription of name of the company- As per Section 12, a company shall have
its name printed on bundles; promissory notes, bills of exchange and such other
documents as may be prescribed. Thus, where an officer of the company signs on
behalf of the company any contract, bill of exchange, hundi, promissory note, cheque
or order of money; such person shall be personally liable to the holder if the name of
the company is either not mentioned, or is not properly mentioned. The company and
its officer who is in default shall be liable to a penalty of one thousand rupees for each
day during which such default continues or for one lakh rupees, whichever is less.
In Hendon v. Adelman,1 the directors were held personally liable for a cheque signed
by them in the name of a company stating the company as L.R. Agencies Ltd.
whereas the real name of the company was L&R Agencies Ltd.
(b) Misstatements in Prospectus- Under the provisions of Section 34 and 35 of the
companies Act, 2013, in case of misrepresentation in prospectus, the company and
every director, promoter, expert and every other person, who authorized such issue of
prospectus shall be liable to compensate the loss or damage to every person who
subscribed for shares on faith of untrue statement.
Besides, these persons may be punished with imprisonment for a term which shall not
be less than six months but which may extend to ten years and shall also be liable to
fine which shall not be less than the amount involved in the fraud, but which may
extend to three times the amount involved in the fraud, as per the provisions of
Section 447. However, a person may escape the aforesaid conviction if he proves that
such statement or omission was immaterial or that he had reasonable ground to
believe, and did up to time of issue of the prospectus believe, that the statement was
true or the inclusion or omission was necessary.
In Edgington v. Fitzmaurice,2 the directors of a company issued a prospectus inviting
subscriptions for debentures. They stated in prospectus that the objects of debentures
1 (1973) New LJ 637

were to complete alterations in the buildings of the company and to purchase horses
and vans to expand the trade of the company. It was found that the real object of the
loan was to enable the directors to pay-off pressing liabilities. The plaintiff took
debentures relying upon the statements in the prospectus. The company became
insolvent; therefore the plaintiff sued the directors for fraud. The court held that, the
directors had misrepresented through the statements in the prospectus which was
material to the contract.
(c) Failure to Return Application Money- According to Section 39, in the case of issue
of the shares by a company to the public, if minimum subscription, as stated in the
prospectus has not been received within 30 days of the issue of prospectus or such
other period as may be specified by the SEBI, the application money shall be repaid
within a period of 15 days from the closure of the issue and if any such money is not
so repaid within such period, the directors of the company who are officers in default
shall be held jointly and severally liable to repay the money with interest at the rate of
fifteen percent per annum. In case of default, the company and its officer who is in
default shall be liable to a penalty of one thousand rupees for each day during which
such default continues or one lakh rupees, whichever is less.
(d) For facilitating the task of an Inspector appointed to investigate the affairs of a
Company- It is the power of inspector to investigate affairs of another company in
same group or management. 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 219 provides that if an inspector appointed under section 210 or 212 or 213 to
investigate into the affairs of a company considers it necessary for the purpose of
investigation, to investigate also the affairs of1. Any other body corporate which is, or has at any relevant time been the
companys subsidiary company or holding company, or a subsidiary of its holding
company;
2. Any other body corporate which is, or has at any relevant time been managed by
any person as managing director or as manager, who is, or was, at the relevant
time, the managing director or the manager of the company;
3. Any other body corporate whose Board of Directors comprises nominees of the
company or is accustomed to act in accordance with the directions or instructions
of the company or any of its directors; or
4. Any person who is or has at any relevant time been the companys managing
director or manager or employee,
He shall, subject to the prior approval of the central government, investigate into
and report on the affairs of the other body corporate or the managing director or

2 (1885) 29 Ch D 459 (465)

manager, in so far as he considers that the results of his investigation are relevant
to the investigation of the affairs of the company for which he is appointed.
In Life insurance Corporation of India v. Hari das mundhra, 3 a Division Bench of
the Allahabad High Court was dealing with a Corporation which owned and
operated a large number of companies and it also owned 100 per cent share capital
of its subsidiary company and controlled all its subsidiaries managing agency. It
was found that a member of the Corporation filed a petition under sections 397
and 398 of the Companies Act for removal of certain directors of the Corporation
and for appointing Special Officer for investigation of the affairs of the
Corporation and some of the respondents. In that case, learned Company Judge
held that the affairs of the Corporation were conducted in a manner prejudicial to
the interest of the Corporation and its shareholders and it was necessary to settle a
scheme for management of the Corporation under section 398 of the Companies
Act, though the evidence was not sufficient to establish misfeasance of the
directors. Thus, two appeals were preferred before the Division Bench of the
Allahabad High Court and the question before the Division bench was whether
while dealing with the affairs of the holding company under sections 397 and 398
of the Companies Act, it is permissible to investigate into the affairs of its
subsidiaries.
The learned Judge held that the company and subsidiary company are separate
legal entities and broadly speaking, their affairs are separate. But for certain
purpose, the affairs of the subsidiary company are treated as the affairs of the
holding company under sections 214 (2), 318(3) (e). It was found that the holding
company considered and sanctioned transactions relating to the purchase and sale
of shares of the subsidiary company. Learned Judge further found that whenever
the subsidiary company found itself in financial difficulty, it approached the
holding company for funds. Learned Judge therefore held that the subsidiary
company is a branch or a department of the holding company and the affairs of the
subsidiary company became the affairs of the holding company and hence, the
affairs of the subsidiary company were relevant under sections 398 and 543 read
with Schedule XI of the Companies Act.
(e) Fraudulent Conduct- Sometimes it may appear in the course of winding up that the
business of a company has been carried on with intent to defraud creditors of the
company or any other person or for any fraudulent purpose. In such a case, the
Tribunal, on the application of the Liquidator or any creditor or contributory of the
company, may declare that the persons who were parties to such business shall be
personally responsible for such debts of the company as the Tribunal may direct.
Besides, every person who was knowingly a party to such conduct of business is
punishable with imprisonment or fine or both.

3 (36 Comp Cas 371)

In William C Leitch Bros Ltd, re,4 goods were purchased on credit when the managing
director knew that the company was hopelessly insolvent. He was held liable for such
fraud. But where a company remained in business only to save certain debentures
from becoming invalid5, and where an auditor failed to report a fraud,6 no
responsibility arose under the section. But officers guilty of filing false purchase tax
returns have been held liable.7
Even a single act of fraud can amount to fraudulent trading. In Cooper Gerard
Chemicals Ltd, re,8 a company obtained a price of certain goods to be supplied by it in
advance knowing that it would not be able to supply the goods and paid off a creditor
with that money. This was held to be sufficient to constitute fraudulent trading and
both the company and the creditor, who knew how he was paid, were liable to refund
the money.
(f) Liability for Ultra Vires Actions- Directors and other officers of a company will be
personally liable for all those acts which they have done on behalf of a company if the
same are ultra vires the company.
The object clause of the Memorandum of the company contains the object for which
the company is formed. An act of the company must not be beyond the scope of the
objects clause, otherwise it will be ultra vires and, therefore, void and cannot be
ratified even if all the members wish to ratify it. This is called the doctrine of ultra
vires, which has been firmly established in the case of Ashbury Railway Carriage and
Iron Company (Limited) v Hector Riche9. Thus the expression ultra vires means an act
beyond the powers. Sometimes the expression ultra vires is used to describe the
situation when the directors of a company have exceeded the powers delegated to
them. Where a company exceeds its power as conferred on it by the objects clause of
its memorandum, it is not bound by it because it lacks legal capacity to incur
responsibility for the action, but when the directors of a company have exceeded the
powers delegated to them, they are bound by such an act.

4 (1932) 2 Ch 71
5 Patrick & Lyon Ltd, re [1933Ch 786]
6 Maidstone Building Provisions Ltd, re [(1971) 1 WLR 1085]
7 Cyona Distributors Ltd, re [(1967) 2 WLR 369]
8 [(1978) 2 WLR 866]
9 (1874-75) L.R. 7 H.L. 653

The doctrine of ultra vires was recognized in the case of Jahangir R. Modi v. Shamji
Ladha10 and have been well established and explained by the Supreme Court in the
case of A. Lakshmanaswami Mudaliar v. Life Insurance Corporation Of India11. Even
in India it has been held that the company has power to carry out the objects as set out
in the objects clause of its memorandum, and also everything, which is reasonably
necessary to carry out those objects. For example, a company which has been
authorized by its memorandum to purchase land had implied authority to let it and if
necessary, to sell it. However it has been made clear by the Supreme Court that the
company has, no doubt, the power to carry out the objects stated in the objects clause
of its memorandum and also what is conclusive to or incidental to those objects, but it
has no power to travel beyond the objects, or to do any act which doesnt have a
reasonable proximate connection with the object or which would only bring an
indirect or remote benefit to the company.
In Weeks v. Propert12, the directors of a railway company which had fully exhausted
its borrowing powers advertised for money to be lent on the security of debentures.
W lent 500 upon the faith of the advertisement and received a debenture. The court
held that, the debenture was void but W could sue the directors for breach of
warranty of authority since they had by advertisement warranted that they had the
power to borrow which in fact they didnt have.
(g) Liability under Other Statutes- Besides the Companies Act, 2013, the directors and
other officers of the company may be held personally liable under the provisions of
other statutes.
Under the Income Tax Act, 1961, where any private company is wound up and if tax
arrears of the company in respect of any income of any previous year cannot be
recovered, every person who was director of that company at any time during the
relevant previous year shall be jointly liable for the payment of tax.13

10 (1867) 4 Bom HCR 185

11 AIR 1963 SC 1185
12 [1873] L.R 8 C.P. 427
13 Section 179