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“Piercing the Corporate Veil- Indian Scenario”

Submitted By
Jayant Sharma
Division – D
PRN – 17010223090
Program – BA LLB

Symbiosis Law School, NOIDA


Symbiosis International (Deemed University)

Under the guidance of


Mr. Rajnish Jindal & Ms. Sonakshi Kumar
Faculty,
Company Law I
CERTIFICATE

The Project entitled “Piercing the Corporate Veil- Indian Scenario” submitted to
the Symbiosis Law School, NOIDA for Company Law I as part of Internal
assessment is based on my original work carried out under the guidance Mr.
Rajnish Jindal & Ms. Sonakshi Kumar, Company Law I from July,2019 to
August,2019. The research work has not been submitted elsewhere for award of
any degree.

The material borrowed from other sources and incorporated in the submission
has been duly acknowledged.

I understand that I myself could be held responsible and accountable for


plagiarism, if any, detected later on.

Signature of the candidate

Date: August 07, 2019


ACKNOWLEDGEMENT

I have immense pleasure in successful completion of the work titled:

“Piercing the Corporate Veil- Indian Scenario”

I acknowledge the help and support extended for this study by Mr. Rajnish Jindal & Ms.
Sonakshi Kumar, Faculty for Company Law I, who gave me continuous guidance, assistance
and inspiration to continue efficiently working on my project. I greatly appreciate the help,
understanding and motivation extended for the project work, I am indebted to everyone, who
did their best to bring improvements through their suggestions.

I am also thankful to my college” library staff & administrative staff who have been helpful
directly or indirectly in some way. Also, special thanks to all my dear mates who constantly
supported and guided me in this research project.

And at last, I would like to thank my parents, who encouraged me to extend my reach, with
their help, understanding, guidance, encouragement and support, I am able to complete this
assessment with all my capacity.
ABSTRACT

From the juristic point of view, a company is a legal person distinct from its
members [Salomon v. Salomon and Co. Ltd. (1897) A.C 22]. This principle may be referred
to as the ‘Veil of incorporation’. The courts in general consider themselves bound by this
principle. The effect of this Principle is that there is a fictional veil between the company and
its members. That is, the company has a corporate personality which is distinct from its
members. But, in a number of circumstances, the Court will pierce the corporate veil or will
ignore the corporate veil to reach the person behind the veil or to reveal the true form and
character of the concerned company. The rationale behind this is probably that the law will
not allow the corporate form to be misused or abused. In those circumstances in which the
Court feels that the corporate form is being misused it will rip through the corporate veil and
expose its true character and nature disregarding the Salomon principal as laid down by the
House of Lords. Broadly there are two types of provisions for the lifting of the Corporate
Veil- Judicial Provisions and Statutory Provisions. Judicial Provisions include Fraud,
Character of Company, Protection of revenue, Single Economic Entity etc. while Statutory
Provisions include Reduction in membership, Misdescription of name, Fraudulent conduct of
business, Failure to refund application money, etc. This article at first introduces to the
readers the concept of “Veil of incorporation”, then it explains the meaning of the term-
‘Lifting of the Corporate Veil’, it then points out the Judicial as well as the Statutory
provisions for Lifting of The Corporate Veil with the help of various case-laws.

INTRODUCTION

A legal concept that separates the personality of a corporation from the personalities of
its shareholders, and protects them from being personally liable for the company's debts and
other obligations. This protection is not ironclad or impenetrable. Where a court determines
that a company's business was not conducted in accordance with the provisions of corporate
legislation (or that it was just a façade for illegal activities) it may hold the shareholders
personally liable for the company's obligations under the legal concept of lifting the corporate
veil.
Piercing a corporate veil is an attempt to hold the shareholders or members of a corporation
accountable for the corporation’s debt. This concept can be better explained as, when the
owner of a business is personally held liable for the liabilities, debts and obligations of the
business. This process is mainly ordered by a legal professional, such as judge to remove the
usual legal shield from the shareholders and directors of a company, if they have used their
business to commit a fraud against the creditor or executed any illegal act. This allows the
creditors to carry out legal proceedings against the individuals rather than the company.

Incorporation by registration was introduced in 1844 and the doctrine of limited liability
followed in 1855.Subsequently in 1897 in Solomon v. Solomon & 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 simply laid down that a
company is a distinct legal person entirely different from the members of that company. What
this means is that the company has life of its own, can own property, can sue and be sued in
its own name, has perpetual life and existence to name a few of the benefits of incorporation.
It is a trite law that a rather hefty veil is drawn between these two that can be lifted only in a
limited number of circumstances that seem to be fluctuating according to current judicial
thinking.

However the courts have not always applied the principal laid down in Solomon v. Solomon
& Co. In a number of circumstances, the court will pierce the corporate veil or will ignore the
corporate veil to reach the person behind the veil or reveal the true form and character of the
concerned company. The rationale behind this is probably that the law will not allow the
corporate form to be misused or for the purposes which is set out in the statute. In those
circumstances in which the court feels that the corporate forms is being misused it will rip
through the corporate veil and expose its true character and nature disregarding the Solomon
principal as laid down by the house of lords.

INDIAN LAW

The most of the provisions of Indian company law were borrowed from English law, it more
or less resembles the English law. The Salomon's case has been the authority since in the
decisions of the doctrine of Indian company cases.
The Supreme Court in Tata Engineering Locomotive Co. Ltd. v. State of Bihar and
others1,"the corporation in law is equal to natural person and has a legal entity of its own. The
entity of corporation is entirely separate from that of its shareholders; it bears its own names
and has seal of its own; its assets are separate and distinct from those of its members, the
liability of the members of the shareholders is limited to the capital invested by them,
similarly, the creditors of the members have no right to the assets of the corporation."

In LIC of India v. Escorts Ltd2, Justice O. Chinnapa Reddy had stressed that the corporate
veil should be lifted where the associated companies are inextricably connected as to be in
reality, part of one concern. After the Bhopal Gas leak disaster case, the lifting of corporate
veil has been escalated. Furthermore in state of UP v. Renusagar Power Company 3 , the
Supreme Court lifted the veil and held that Hindal co, the holding company and its
subsidiary, Renusagar must be treated as the own source of generation of Hindalco and on
that basis, Hindalco would be liable to pay the electric duty.

NEED IN THE PRESENT SCENARIO

The theory of lifting the corporate veil becomes necessary when unscrupulous people started
using the corporate veil as an instrument to conceal fraud in company's affairs. Thus, it
become compulsory for the legislature and court to evolve and to lift the corporate veil and
find out the person behind the company, who are the actual beneficiaries of the corporate
body.

In Andhra Pradesh State Road Transportation Case4the Supreme Court pointed out that a
corporation has a separate legal entity is so firmly rooted in our notions derived from
common law that it is hardly necessary to deal with it elaborately. Over the years this
doctrine has gained sufficient importance and usage. With increasing issues related to
companies, the significance of this doctrine has evolved over the years. With the
increasing mergers and acquisitions, and more risks of attempts towards tax evasions, they
form the most prominent of these issues, while the others include demand for public

1
AIR 1955 SC 74
2
AIR 1965 SC 40
3
AIR 1973 AII 73
4
AIR 1998 SC 54
interest, cases of fraud, improper conduct and violation of statutory obligations etc. which
have been already mentioned previously.

JUDICIAL APPROACH

The theory of piercing the corporate veil cannot be ignored in the circumstances where in
fraud, oppression and misconduct, etc. is required to be detected by the court. These are the
situations when the court will lift the corporate veil of the company with the view to examine
the actual persons who stand behind the corporate mask. The doctrine of lifting the veil is a
device which is developed to avoid the hardships of the doctrine of corporate personality.

The corporate veil is said to be lifted when the court ignores the company and concerns itself
directly with the members or managers.InUnion of India and others v. Playworld Electronics
Pvt. Ltd. & Ors5.the Supreme Court held that the legislature cannot be expected to enumerate
each and every device which may be used by the members of the company to evade tax etc.
It is at the discretion of the Court whether to lift the corporate veil of the corporation or not,
because it depends on the different situations, but in some circumstances it is highly desirable
for the Court to lift the corporate veil.There are various situations in which the judiciary has
used this doctrine.

1. Determination Of The Character Of The Company

The corporate veil has been lifted by the courts to determine the enemy character of a
company in time to war. The court will lift the veil for the purposes of finding out the person
who in reality control the company's affairs and if the affairs of the company are found to
have been controlled by enemy aliens, it will assume enemy character.

2. Evasion Of Tax

The corporate device is often used as a means of avoiding forms of tax. It is very difficult for
the legislature to plug all the gaps in the law and thus the judiciary has to stop it. The Courts
very often resort to lifting of the veil in order to find out the true intent of the company.

5
(1991) 70 comp. Cas. 127
Bacha F. Guzdar v. Commissioner of Income tax, Bombay 6 ,In this case, the agricultural
income was exempt from tax under the income tax Act. The income of a tea company was
exempt to the extent of 60% as agricultural income and 40% was taxed as income from
manufacture and sale of tea. The plaintiff, a member of the tea company received certain
amount as dividend in respect of shares held by her in the company. She claimed that 60% of
her dividend income should be exempt from the income tax being an agricultural income.
The Supreme Court rejected the argument of the plaintiff and held that although the income
in the hands of the company was partly agricultural, yet the same income when received by
the shareholders as dividend could not be regarded as agricultural income. .CIT v. Associate
Clothiers Ltd.7in this case a company was incorporated by certain assess who held all its
shares. Thereafter the assess sold certain premises to the company. The question arose
whether the difference between the selling price and the cost of the property should be
regarded as the profits received by the assesses and therefore, taxable income because the
transfer of the premises by the assesses was merely a transfer from self to self and it was not
a commercial sale from person to another person, but the contention of the assesses was
rejected by the Court on the ground that a company after incorporation becomes a legal
person district from its shareholders and thus the sale of the premises by the assesses to the
company should be regarded as a sale from one entity to another entity and the difference
between the selling price and the cost of the property should be treated as the taxable income
in the hands of the assesses.

3. Fraud Or Improper Conduct

Where the medium of a company has been used for committing fraud and improper conduct,
courts have lifted the veil and looked at the realities of the situation.In Delhi Development
Authorityv. Skipper Construction Company Pvt Ltd.8the DDA had entered into a contract for
construction on a piece of land. After prolonged delays and problems, the DDA had to finally
order the construction company to stop the construction and hand over the land to DDA. The
company inspite of a Court order to this effect, had already collected various monies from
parties, agreeing to sell the space and had in fact, sold the same space to more than one party
in the situations. The Supreme Court stated that this was a fit case for lifting of the corporate

6
AIR 1965 SC 40
7
(1986) 1 SCC 264
8
AIR 1996 SC 2005
veil and the veil must be lifted when the device of incorporation is being used for some
illegal or improper purpose. The Court thus found the individual members behind the
corporate body liable for the acts that they attempt to carry on through the guise of the
company.

4. Avoidance Of Welfare Legislation

Where it was found that the sole purpose for the formation of the new company was to use it
as a device to reduce the amount to be paid by way of bonus to workmen, the supreme court
upheld the piercing of the veil to look at the retranslation.

5. Economic Offences

InSantanu Ray v. Union of India9,it was held that in case of economic offences a Court is
entitled to lift the veil of corporate entity and pay regard to the economic realities behind the
legal facade. In this case, it is alleged that the company had violated section 11(a) of the
central excises and salt act, 1944. The Court held that the veil of corporate entity could be
lifted by adjudicating authorities so as to determine as to which of the directors was
concerned with the evasion of the excise duty by reason of fraud, concealment or wilful mis-
statement or suppression of facts or contravention of the provisions of the act and the rules
made there under.

6. Agency

According to this classification, the Courts examine whether or not the company is acting as
an agent of some of its shareholders or other members of the company. In such a situations
the veil may be lifted to make these persons liable for the companies acts.
In Smith Stone and knight v. Birmingham Corporation10,a company required a partnership
concern and registered it as a company and continued to carry on the acquired business as
subsidiary company. The parent company held all the shares except five which were held in
trust for the company by its directors. When the Birmingham Corporation compulsorily

9
AIR 2008 SC 406
10
(1930) 2 All ER 116
acquired the premises for the subsidiary, the parent plaintiff corporation claimed
compensation. The contention for the respondent, however was that the proper party for
claiming compensation was the subsidiary and not the parent corporation as they were two
separate legal entities. The Court held that the subsidiary company was nothing more than an
agent of the parent company, and therefore all the acts of the subsidiary were attributable to
the parent company. The subsidiary, not operating in its own behalf but on that to the parent
was sufficient reason for the parent to claim compensation on behalf of the subsidiary. Thus
though the separate legal entity of the subsidiary was recognised. The agency principle was
applied to identify the parent company as the principle and the subsidiary as its.

CONCLUSION

The project finds that, this device merely seeks to strike a balance between the interest of the
public and the concept of a separate personality. Thus the device is essentially used as a
flexible tool to ensure justice. It would be defeat the object of the device if it were to be
applied rigidly with no scope at all left for judicial discretion. There can be no single unifying
principle that underlines the decisions of the Courts. Although on ad hoc explanation may be
offered by a Court which so decides, there is no principle approach to be derived from the
authorities. Thus it is not possible to evolve a rational, consistent and inflexible principle
which can be invoked in determining the question as to whether the veil of corporation
should be lifted or not. Courts and Legislature must adopt a single set of statutory standards
as to when limited liability should be disregarded. This will provide the certainty in this area
of law and will allow uniformity, applying the doctrine of lifting the corporate veil.

REFERENCE
Books
 Company Law, S.R. Myneni, 3rd Ed., 2017
 Company Law and Practice, G K Kapoor and Sanjay Dhamija, 20th Ed., 2015
 Companies Act, 2013 with SEBI (Issue of Capital and Disclosure Requirements)
Regulations, 2009, Ravi Pullani & Mahesh Pullani, 24th Ed., 2017
 C R Datta on Company Law, C.R. Dutta, 7th Ed., 2016
 Taxman’s Company Law, G K Kapoor Sanjay Dhamija, 5th Ed., 2017