Doctrine of Lifting Corporate Veil: Overview

INTRODUCTION

There is a line between the shareholders, members, or directors of the Company and the Company itself which possesses a separate legal personality. The concept that the Company is a separate legal entity was first developed in the landmark judgment of Salomon v. Salomon & Co. Ltd.[1] This was further held in several other cases like Lee v. Lee’s Air Farming Ltd.[2] and Macaura v. Northern Assurance Co. Ltd.[3] The Doctrine of Lifting the Corporate Veil means disregarding this corporate personality as and when needed. As indicated in the Black Law Dictionary, ‘piercing of the corporate veil is the judicial demonstration of imposing liability on otherwise insusceptible corporate officials, Directors and investors for the company's illegitimate acts.’ As noted by Lord Denning in Littlewoods Mail Order Stores Ltd. v. IRC[4], incorporation does not fully: "cast a veil over the personality of a limited company through which the courts cannot see. The courts can, and often do, pull off the mask. They look to see what really lies behind."

PIERCING OF THE CORPORATE VEIL

The Doctrine of Piercing the Corporate Veil means holding the members accountable for their obligations and liabilities towards the corporation. In such cases, the Courts can disregard the corporate personality of the Company and directly hold its members responsible for their wrongdoings. Broadly speaking, there are two main purposes which this Doctrine serves-

(i) The Company cannot be treated as an independent entity always. For eg- It cannot be held liable for any criminal acts as it has no mens rea.

(ii) If there was no such exception to the separate entity principle, then the Directors, shareholders, and other members would use it as a shield of limited liability which would lead to potentially disastrous consequences.[5]

GROUNDS UNDER WHICH THE DOCTRINE CAN BE APPLIED

It is not possible to ascertain the exact grounds that can be applied to break down the corporate insulation.[6] Whether to lift the Corporate Veil or not is entirely the discretion of the Courts and the underlying social, economic, and moral factors would play an important role in determining the same.[7] But there are certain common grounds under which this Doctrine has been applied time and again. They are as follows-

1. Fraud- This is one of the most common grounds for the Courts to pierce/lift the Corporate Veil as they do not want the Solomon principle (Company as a separate legal entity from its members) to be used as a tool for committing fraud. This can be substantiated with two classic case laws-

(a) Gilford Motor Company Ltd. v. Horne[8]-

(b) Jones v. Lipman[9]

There are 3 factors which should be considered for this ground to be applied-

• The character of the legal obligation evaded[10]
• Motives of the fraudulent person[11]
• Timing of the incorporation of the device company[12]

1. Group Enterprises- A group of enterprises is usually seen as different legal entities but sometimes it may happen that the Courts may see the group of enterprises as a single legal entity and lift the corporate veil in order to look at the economic realities of the group itself. In the case of D.H.N. Food products Ltd. v. Tower Hamlets London Borough Council[13], three subsidiary companies were treated as part of the same economic entity or group and were entitled to compensation.
2. Agency- If a Company is acting as an agent of some of its shareholders or other members of the Company, the veil may be lifted by the Courts and those persons can be held liable for their wrongful acts for the Company. This was also held in the case of Smith, Stone and Knight Limited v Birmingham.[14]
3. Enemy Character- As in the case of Daimler Co Ltd v. Continental Tyre & Rubber Co (Great Britain) Ltd[15], the Court, in times of war, is prepared to lift the corporate veil and determine the nature of shareholding.
4. Tax- In cases of tax evasion, it becomes necessary to lift the Corporate Veil. Certain tax legislations warrant for the same.[16]
5. Tort- Usually the Veil is not lifted in cases of Torts.
6. Trust- The Courts may lift the Corporate Veil in order to determine the characteristics of the shareholders as it did in the case of The Abbey And Malvern Wells Ltd. v. Ministry of Local Government and Planning[17] in order to look into the terms on which the trustee held the shares.

STATUTORY PROVISIONS WITH REGARD TO LIFTING OF CORPORATE VEIL IN INDIA

The following are some of the statutory provisions which point towards the application fo the Doctrine of Lifting the Corporate Veil-

1. Companies Act, 2013[18]
2. The Income Tax Act, 1961[19]
3. Foreign Exchange Regulation Act, 1973[20]

CONCLUSION

Hence, it can be concluded that the application of the Doctrine of Lifting of Corporate Veil at times becomes a very essential tool to prevent the members from cloaking their wrongdoings and escaping from their liabilities and obligations. In India, the question of lifting this veil between the holding company and subsidiary companies is still unanswered. In the case of Life Insurance Corporation of India v. Escorts Ltd.,[21] the Court had refused to live the veil while in the case of State of UP v. Renusagar Power Company [22] the Supreme Court had lifted the corporate veil. Thus, a calibrated set of grounds has still not been formulated as to when to lift the veil and when not to lift the veil. It depends on the discretion of the Court and the facts of each and every case. However, it should seek to strike a balance between the interest of the public and the separate legal personality of the Company.

This article is authored by Nandini Menon, a 3rd-year student pursuing a 5-year law course [BSW LLB (Hons.)] at the Gujarat National Law University (GNLU).

Disclaimer: The article is an original submission of the Author. Niti Manthan does not hold any liability arising out of this article. Kindly refer to our terms of use or write to us in case of any concerns.

[1] [1897] A.C. 22.

[2] [1961] AC 12.

[3] [1925] AC 619.

[4] [1969] 1 W.L.R. 1241, 1254.

[5] legal India, 'Lifting Of Corporate Veil: Indian Scenario' (Legalservicesindia.com, 2020) <http://www.legalservicesindia.com/article/1876/Lifting-of-Corporate-Veil:-Indian-Scenario.html#:~:text=InSantanu%20Ray%20v.,excises%20and%20salt%20act%2C%201944.> accessed 7 July 2020.

[6] Warner Fuller, 'The Incorporated Individual: A Study Of The One-Man Company' (1938) 51 Harvard Law Review <https://www.jstor.org/stable/1333402?seq=1> accessed 7 July 2020.

[7] Tata Engineering Locomotive Co v. State of Bihar AIR [1965] SC 40.

[8] [1933] Ch. 935 (CA).

[9] [1962] l WLR 832.

[10] Adams v Cape Industries Plc [1990] Ch. 433 (CA (Civ Div).

[11] ibid.

[12] Creasey v Breachwood Motors Ltd [1992] B.C.C. 638 (QBD).

[13] [1976] 1 WLR 852.

[14] [1939] 4 All ER 116.

[15] [1916] 2 A.C. 307 (HL).

[16] Eg.- The Income Tax Act, 1961.

[17] [1951] 1 CH 728.

[18] Sections 34, 35, 39, 339.

[19] Sections 178, 179, 278.

[20] Section 63.

[21] AIR [1986] SC 1370.

[22] AIR [1988] SC 1737.