4.

Development and Meaning of Doctrine of Lifting Veil

MEANING OF DOCTRINE OF LIFTING OF CORPORATE VEIL
In Volume 32A of Words and Phrases (West Publishing Company - third reprint 1989 p.84) the term "piercing the corporate veil" is described as, "the Court's unwillingness to permit corporate presence and action to divert judicial course of applying law to ascertain facts". When this principle is invoked, it is permissible to show that the individual hiding behind the corporation is liable to discharge the obligations ignoring the concept of corporation as a separate entity.

DOCTRINE IS FAIRLY SETTLED: INDIAN EXPRIENCE It is no doubt, true that a company is a distinct legal entity separate from its shareholders. However, the
principle of piercing the veil of corporate personality' is now a well -settled principle of Company law and in our opinion, this will apply in the present case, observed Delhi HighCourt of in the case of Mrs. Prem Lata Bhatia vs Union Of India (UOI) And Ors.[1]

DEVELOPMENT OF DOCTRINE IN INDIA

In Delhi Development Authority case (supra), the Supreme Court, following its decision in Tata Engineering and Locomotive Company Ltd. v. State of Bihar, AIR [2] , observed : "The law as stated by Palmer and Gower has been approved by this Court in Tata Engineering and Locomotive Company Limited v. State of Bihar, : AIR 1965 SC 40. The following passage from the decision is apposite (Para 27 of AIR) : "Gower has classified seven categories of cases where the veil of a corporate body has been lifted. But it would not be possible to evolve a rational consistent and inflexible principle which can be invoked in determining the question as to whether the veil of the corporate personality should be lifted or not. Broadly, where fraud is intended to be prevented, or trading with enemy is sought to be defeated, the veil of corporation is lifted by judicial decisions and the shareholders are held to be persons who actually work for the corporation." Thus in the case of Sanjay Kumar Gupta(supra) Allahbad High Court quoted Supreme Court of inndia in this manner: In Tata Engineering's case (supra) the Supreme Court observed that the doctrine of the lifting of the veil tints marks a change in the attitude that law had originally adopted towards the concept of the separate entity or personality of the Corporation. As a result of the impact of the complexity of economic factors, judicial decisions have sometimes recognized exceptions to the rule about the jurstic personality of the corporation. It may be that in course of time these exceptions may grow in number and to meet the requirements of different economic problems, the theory about the personality of the corporation may be confined more and more. It went on citing the following as well: Thus, the Supreme Court itself has stated that with the passage of time the except ions to the rule of corporate personality can grow in number to meet the new requirements, and these exceptions have an expanding horizon. In our opinion, the doctrine of piercing the veil of corporate personality must be adopted by our Courts, in the matter of electricity dues, as this has assumed mammoth dimensions of hundreds or thousands of crores of rupees which unscrupulous businessmen are not paying under cover of the doctrine of corporate personality. Hence we are of the opinion that so far as electricity dues are concerned this Court will pierce the veil of corporate personality and shall not give shelter to the businessmen who seek protection under the doctrine of corporate personality.[3]

SC

5. CATEGORIZATION OF JUDICIAL PRONOUNCEMENTS ON LIFTING OF VEIL

CATEGORIZATION OF JUDICIAL PRONOUNCEMENTS ON LIFTING OF VEIL

After making a special study of this branch of the law, a learned scholar has discerned four different attitudes towards the company in judicial pronouncements. According to him these categories, in progressive order, are (i) peeping behind the veil; (ii) penetrating the veil; (iii) extending the veil; and (iv) ignoring the veil. The decisions relating to determination of residence or enemy status of a company have been placed by him in the category of "peeping behind the veil" where the court peeps behind the veil and concludes from the shareholders or from the people in control of the company, something about the nature of the company. If the corporate veil can only be lifted for a faade company, it is important to identify the criteria by which such companies are identified. The issue was raised in the Court of Appeal hearing of Salomon. In Broderip v Salomon Lopes LJ stated: It never was intended that the company to be constituted should consist of one substantial person and six mere dummies, the nominees of that person, without any real interest in the company To legalise such a transaction would be a scandal. The House of Lords rejected this argument; Lord Macnaghten stated: In order to form a company limited by shares, the Act requires that a memorandum of association should be signed by seven persons, who are each required to take one share at least. If those conditions are complied with, what can it matter whether the signatories are relations or strangers? There is nothing in the Act requir ing that the subscribers to the memorandum should be independent or unconnected or that they should have a mind and will of their own ...

6.Need and Scope of Doctrine

NEED OF PIERCING THE CORPORATE VEIL
In every business there is a risk that the business may fail due to recession, competition etc. Hence, businessmen were reluctant to set up new industrial ventures out of fear that if it failed, recovery would be issued in respect of the loans they had taken and thereupon even their household and personal effects may be sold in connection with the recovery. Hence, businessmen were reluctant to take risks and start new industrial ventures. To get over this hurdle and to encourage industrialization the legal principle was created that if a company is inco rporated under the Companies Act, the liability of the shareholders becomes limited because the shareholders, directors etc. are legally treated as being different from the company. A company was held to be a distinct legal entity separate from its shareholders and directors. This legal principle gave protection to businessmen who were otherwise reluctant to start new industrial ventures due to the risk involved. Thus this legal principle was of great help to industrialization in Europe (where industrialization first began during the Industrial Revolution) and thereafter all over the world. Subsequently, however, an exception was carved out to the above principle, viz. the doctrine of piercing the veil of corporate personality.[1] The doctrine of the lifting of the veil thus marks a change in the attitude that law had originally adopted towards the concept of the separate entity or personality of the corporation. As a result of the impact of the complexity of economic factors, judicial decisions have sometim es recognised exceptions to the rule about the juristic personality of the corporation. It may be that in course of time these exceptions may grow in number and to meet the requirements of different economic problems, the theory about the personality of the corporation may be confined more and more. In recent decisions the trend is of expanding the scope of the doctrine of piercing the veil of corporate personality. This principle, as noted by the Supreme Court in the aforesaid decisions, is of an expanding nature and new situations can be brought within its scope. Hence, it cannot be said that it is limited to cases of fraud or evasion of legal obligations. The important question therefore ,observed the Court,arises is as to in what manner, and in what direction, can the Courts expand the principle? To answer this question correctly we have to go back again to the historical reason why the legal principle was created that a company is a distinct legal entity separate from its shareholders and directors. As already mentioned above, this legal principle was created (initially in Western Europe, where industrialization first began) in order to encourage and facilitate industrialization. In the absence of this legal princ iple businessmen were reluctant to start new industrial ventures out of fear that if the venture failed (due to recession, competition, etc.) even their household goods and personal effects may be sold. Hence the legal principle of corporate personality was created, without which industrialization may not have been possible, or at least not at the speed at which it was done in Europe, and thereafter in other countries. And it further stated that: Keeping this historical background in mind we can immediately see that the purpose of the principle of separate corporate personality is to encourage and facilitate industrialization, not to obstruct it. Hence a mechanical interpretation of the principle of corporate personality is to be avoided, as it may frustr ate the very purpose for which it was made viz. to promote growth of industries. Consequently, the exception to the principle, namely, the

doctrine of piercing the veil of corporate personality should be adopted not merely in cases of fraud or evasion of legal obligations but also in a large number of cases where it would promote the growth of industry. In this way, both the principle of corporate personality as well as its exception, viz. the doctrine of piercing the veil of corporate personality will serve a common complementary purpose, namely, to promote industrialization. Such an interpretation would serve the main national objective of our country which is rapid industrialization[2].

SCOPE OF THE DOCTRINE

In Punjab National Bank Finance Limited vs Shital Prasad Jain And Ors,[3]the court has observed the scope of the doctrine as : It will be thus seen that the doctrine of piercing the corporate veil is not confined to cases of tax assessment etc. only and the Court may invoke this doctrine, wherever necessary, in the interest of justice to prevent the corporate entity from being used as an instrument of fraud. In other words the fundamental principle of corporate personality itself may be disregarded having regard to the exigencies of the situation and for the ends of justice. In recent decisions the trend is of expanding the scope of the doctrine of piercing the veil of corporate personality. This principle, as noted by the Supreme Court in the aforesaid decisions, is of an expanding nature and new situations can be brought within its scope. Hence, it cannot be said that it is limited to cases of fraud or evasion of legal obligations[4]. There are, however, a number of judicial and statutory exceptions to this fundamental rule which operate to lift or pierce the corporate veil between the company and its shareholder and directors. An early example is Re Darby, ex p Brougham [5]where the High Court treated a company formed by two fraudsters as merely an alias for themselves. In Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd[6] the corporate veil of a UK registered company was pierced to determine its nationality in time of war. Throughout the twentieth century, there are numerous examples of judicial lifting or piercing of the veil. This culminated in decisions like DHN Food Distributors Ltd v Tower Hamlets London Borough Council[7] where the Court of Appeal treated the three companies in a group as a single economic entity. This very criticized decision marks the high point in judicial piercing of the veil of incorporation, and reinforced the demands for some principles to be established so that litigants could predict when the court would or would not lift the corporate veil. The Court of Appeal decision in Adams v Cape Industries plc[8] rationalized the judicial exceptions to the rule in Salomon v A Salomon & Co Ltd. The case involved a claim in respect of employees of an American subsidiary of Cape Industries to enforce a judgment against the subsidiary in respect of damages for exposure to asbestos against the UK parent. The claimants made three submissions in respect of piercing the corporate veil between the subsidiary and the parent: that the companies were a single economic unit, that the American subsidiary was a faade created to allow the parent to escape liability, and that the subsidiary was the agent of the parent. In rejecting the submissions, Slade LJ stated: Neither in this class of case nor in any other class of case is it open to this court to disregard the principle of Salomon v A Salomon & Co Ltd merely because it considers it just to do so. This reflected a move away from the statement in Re A Company [9]where the Court of Appeal stated: In our view the cases show that the court will use its power to pierce the corporate veil if it is necessary to achieve justice . The Court of Appeal rejected the submission that the companies were a single economic unit and limited this exception to cases concerning the interpretation of statutes, contracts, and other documents. It rejected the submission that the subsidiary was a faade because it was created solely to protect the parent company against future or contingent tortuous liability in the USA: the group was entitled to organize its affairs to take advantage of Salomon v A Salomon & Co Ltd. The court rejected the agency argument on the grounds that agency will not be presumed merely because of the closeness of their operations. The decision was confirmed in Yukong Line Ltd of Korea v Rendsburg Investments Corpn of Liberia (No 2)[10]

7. DOCTRINE TO BE EMPLOYED AS POSITIVE INSTRUMENT

DOCTRINE TO BE EMPLOYED AS POSITIVE INSTRUMENT

Keeping this historical background in mind we can immediately see that the purpose of the principle of separate corporate personality is to encourage and facilitate industrialization, not to obstruct it. Hence a mechanical interpretation of the principle of corporate personality is to be avoided, as it may frustrate the very purpose for which it was made viz. to promote growth of industries. Consequently, the exception to the principle, namely, the doctrine of piercing the veil of corporate personality should be adopted not merely in cases of fraud or evasion of legal obligations but also in a large number of cases where it would promote the growth of industry. In this way, both the principle of corporate personality as well as its exception, viz. the doctrine of piercing the veil of corporate personality will serve a common complementary purpose, namely, to promote industrialization. Such an interpretation would serve the main national objective of our country which is rapid industrialization.[1] DOCTRINE NOT AVAILABLE TO COMPANY ITSELF However, it has nowhere been held that such a course of action is open to the company itself. It is not open to the Company to ask for unveiling its own cloak and examine as to who are the directors and shareholders and who are in reality controlling the affairs of the Company.[2] CHARACTERISTICS OF A COMPANY: STATE INSTRUEMENTALITES, ARTICLE 12 OF CONSTITUTION OF INDIA Generally, an incorporated company is liable as a juristic person. It is different from its shareholders and directors of the Board of Company. The acts of malfeasance and misfeasance and acts of misdemeanor by the shareholders and directors of a corporation (company), do not always bind the company as such. However so as to apply law to ascertained facts, judicial process can ignore juristic personality of the

company and haul-up the directors and in certain cases even shareholders to discharge the legal obligations. Court has adopted a similar approach and in some cases it has seen through the corporate veil. In Central Inland Water Transport Corpn. Ltd. v. Brojo Nath Ganguly[3] the Court was considering the question whether the appellant company was an agency or instrumentality of the State for the purpose of Article 12 of the Constitution. It was said: (SCR p. 349 SCC p. 202, para 67) "For the purpose of Article 12 one must necessarily see through the corporate veil to ascertain whether behind that veil is the face of an instrumentality or agency of the State. Can it be held, on the aforesaid pleadings of the parties, that the Bokaro Steel Limited is a department of the Government of India or otherwise an authority within the meaning of Article 12 of the Constitution possessing governmental or quasi-governmental powers so as to make it "State"? It is not in dispute that the Bokaro Steel Limited is a company incorporated and registered under the Indian Companies Act and it has to be presumed that it has got a separate entity from the owner or owners of its shares. Therefore, ordinarily it cannot be held to be a department of the Union of India or possessing Governmental or quasigovernmental powers so as to make it an authority and thus "State" within the meaning of Article 12 of the Constitution. It was , however, requested to pierce the veil by looking to the materials on the record and find out whether it is in fact administered by the Ministry of Iron and Steel of the Government of India so as to make it a department of the Government of India. Is it permissible to us to pierce the veil?

Recently a similar question arose for decision before the High Court of Calcutta in the case of Sunil Kumar Debnath v. Mining and Allied Machinery Corpn. Ltd.[4], The learned Single Judge who heard the application under Article 226 of the Constitution in the first instance rejected it summarily on the ground that the respondent appeared to be a Government company which was neither the Government nor statutory body and so not amenable to the writ jurisdiction. There was a Letters Patent Appeal, After considering both Indian and English authorities on the question, Sinha, C. J., who delivered the judgment concluded as follows"At the present moment, however, regard being had to the state of the authorities, I am of opinion that, as pointed out in 1950-1 KB 18, a Court was not entitled to pierce the veil of corporate entity and to examine the reality underneath. That in my view would be a matter of legislation and not of judicial interpretation. As at present advised, I must hold that a joint stock company is like a private individual except in some restricted cases, namely when the company is a public utility company, and its employees are not civil servants and are not entitled to the protection offered by Article 311 of the Constitution. Therefore, in such cases a writ application under Article 226 of the Constitution does not lie for the purposes of protecting service conditions." It is nowhere asserted in the petitions that the Bokaro Steel Limited is a public utility company. Therefore, it does not come within the exception referred to by the learned Chief Justice of the High Court of Calcutta[5]. In Subodh Ranjan Ghosh v. Sindri Fertilizers and Chemicals Ltd., AIR [6] Bench of Supreme Court found that the Sindri Fertilisers and Chemicals Ltd. was completely owned by the Union Government, that the Directors of the Company were appointed by the President who was also authorised to remove

any of them from his office in his absolute discretion, that the President was authorised to issue such directives as he may consider necessary in regard to the conduct of the business of, the company and that under one of the clauses of its Article a duty was imposed upon the Directors to give immediate effect to the directive so issued by the President. But in spite of these findings, it held that the company had an independent legal entity and an independent legal existence and it could not be said to be a department of the State Government or its delegate or agent. Ramaswami, C. J. (as he then was), Raj Kishore Prasad, J., concurring, further held that the Court was not entitled to pierce the veil of corporate entity and to examine the reality beneath. That decision is binding upon us. Mr. Ghose has not been able to show any decision of the Supreme Court or of a larger Bench of this Court which has taken a view contrary to the decision in Subodh Ranjan Ghosh's case (supra),.

8.LIFTING CORPORATE VEIL AND CIRCUMSTANCES

LIFTING CORPORATE VEIL AND CIRCUMSTANCES
The corporate veil may be lifted in the following instances: to investigate the relationships between the holding company and subsidiary company; 2) to investigate the number and names of members of the company; 3) to investigate the true ownership of shares and controlling power over the company. 4) to investigate lawful objects of the company; 5) to investigate mismanagement and oppression by the majority 6) to investigate the character of the company where it is trading with an alien enemy or persons managing the affairs of the company are under the control of enemies or see residing in enemy country; 7) to investigate into the affairs where there exists a tendency to create monopoly. 8) to investigate the company affairs where it is used for tax evasion or to circumvent tax obligation; 9) to investigate if the company is acting as an agent for its shareholders. 10) To investigate the affairs where it is formed fro frau dulent purposes, to defeat and circumvent the law or to defraud its creditors or to avoid valid obligations. Bombay High Court in (2004) 121 Comp. Cas 314 has held that the corporate veil may be lifted to the extent permitted under the statute and no more. In State of U.P. v Renusagar Power Company[1] the Supreme Court after referring to Life Insurance Corporation of India (supra), declared the law thus; "it is high time to reiterate that in the expanding horizon of modern jurisprudence, lifting of corporate veil is permissible. Its frontiers are unlimited. It must, however, depend primarily on the realities of the situation." In this case it was also observed that there was no allegation that the company was formed to evade legal obligation or commit fraud, but yet the principle of piercing the veil of corporate personality was applied. Thus it cannot be said that the princ iple of piercing the veil of corporate personality applies only when there are allegations of fraud or evasion of legal obligations.

8.LIFTING CORPORATE VEIL AND CIRCUMSTANCES

LIFTING CORPORATE VEIL AND CIRCUMSTANCES
The corporate veil may be lifted in the following instances: to investigate the relationships between the holding company and subsidiary company; 2) to investigate the number and names of members of the company; 3) to investigate the true ownership of shares and controlling power over the company. 4) to investigate lawful objects of the company; 5) to investigate mismanagement and oppression by the majority 6) to investigate the character of the company where it is trading with an alien enemy or persons managing the affairs of the company are under the control of enemies or see residing in enemy country; 7) to investigate into the affairs where there exists a tendency to create monopoly. 8) to investigate the company affairs where it is used for tax evasion or to circumvent tax obligatio n; 9) to investigate if the company is acting as an agent for its shareholders. 10) To investigate the affairs where it is formed fro fraudulent purposes, to defeat and circumvent the law or to defraud its creditors or to avoid valid obligations. Bombay High Court in (2004) 121 Comp. Cas 314 has held that the corporate veil may be lifted to the extent permitted under the statute and no more. In State of U.P. v Renusagar Power Company[1] the Supreme Court after referring to Life Insurance Corporation of India (supra), declared the law thus; "it is high time to reiterate that in the expanding horizon of modern jurisprudence, lifting of corporate veil is permissible. Its frontiers are unlimited. It must, however, depend primarily on the realities of the situation." In this case it was also observed that there was no allegation that the company was formed to evade legal obligation or commit fraud, but yet the principle of piercing the veil of corporate personality was applied. Thus it cannot be said that the princ iple of piercing the veil of corporate personality applies only when there are allegations of fraud or evasion of legal obligations.

9. Corporate Veil to be pierced in cases of Injustice, Inconvenience or against the Revenue

Corporate Veil to be pierced in cases of Injustice, Inconvenience or against the Revenue
In Palmer's Company Law (24th Edn), in chapter 18, para 2 onwards some instances have been given in which the modern company law disregards the principle that the company is an independent legal entity and also when the Courts would be inclined to lift the corporate veil and the important ones being in relation to the law relating to trading with enemy where the test of control is adopted and also where the device of incorporation is used for some illegal or improper purpose. In Gower's Principle of Modern Company Law (4th Edn), in chapter 6, the topic of lifting the veil has been discussed. The learned author has said that there is no consistent principle beyond a refusal by the legislature and the judiciary to apply the logic of the principle laid down in Solomon's case where it is too flagrantly opposed to justice, convenience or the interest of the Revenue. In the cases where veil is lifted, the law either goes behind the corporate personality to the individual members, or ignores the separate personality of each company in favour of the economic entity or ignores the separate personality in favour of the economic entity constituted by a group of associated companies. The principal grounds where such a course of action can be adopted are to protect the interest of the Revenue and also where the corporate personality is being blatantly used as a cloak for fraud or improper conduct.

10. Where statutory effects are to be evaded

Where statutory effects are to be evaded

In Life Insurance Corporation of India v Escorts Limited[1], the Supreme Court laid down that, "the corporate veil may be lifted where a statute contemplates or fraud or improper conduct is intended to be prevented or a taxing statute or a beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be, in reality, part of one concern." A Company formed for escaping some existing legal liability or as part of a scheme to evade the rules of company law could be regarded as a faade and the veil of incorporation could be lifted