LIFTING OR PIERCING

THE CORPORATE VEIL

 ACKNOWLEDGEMENT
The project on “LIFTING OR PIERCING THE CORPORATE VEIL”
would not have seen light of the day without the following
people and their priceless support and co-operation. Hence we
extend our heartfelt gratitude to all of them.

First and foremost, we would show appreciation to Prof. GRACIAS

who set the ball rolling for our project. We are grateful to him
for guiding us throughout the project. Without his invaluable
help we wouldn’t have being able to do real justice to the
project.

On the same lines, we would like to thank our college librarian for
being very obliging and patient to our needs.

Last, but definitely not the least, we would like to thank our
principal Prof. Phadnis for providing all the encouragement &
 LIFTING OR PIERCING THE
CORPORATE VEIL
• From the juristic point of view, a company is a legal person distinct from
its members [Salomon v. Salomon & 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 (and not a wall) between the company and its
members. That is, the company has a corporate personality which is
distinct from its members.
• The human ingenuity, however, started using this veil of corporate
personality blatantly as a cloak for fraud or improper conduct. Thus it
became necessary for the courts to break through or lift the corporate veil
or crack the shell of corporate personality and look at the persons behind
the company who are the real beneficiaries of the corporate fiction.
 And while by fiction of law a corporation is a distinct entity,
yet in reality it is an association of persons who are in fact the
beneficial owners of all the corporate properly.
• “The doctrine laid down in Salomon v. Salomon & co. ltd. Has
to be watched very carefully. It has often been supposed to
cast a veil over the personality of a limited company through
which the courts cannot see. But that is not true. The courts
can and often do draw aside the veil. They an, and often do,
pull off the mask. They look to see what really lies behind.”
 JUDICIAL EXCEPTIONS.
The various cases in which corporate veil have been lifted are as
follows:

1. PROTECTION OF REVENUE. The courts may ignore the

corporate entity of a company where it is used for tax evasion.
Tax planning may be legitimate provided it is within the
framework of law. The following cases illustrate the point:

Sir Dinshaw Maneckjee Petit, Re, A.I.R. (1927) Bom. 371. D, an

assessee, who was receiving huge dividend and interest income,
transferred his investments to 4 private companies formed for the
purpose of reducing his tax liability. These companies transferred
the income to D as a pretended loan. Held, the companies were
formed by D purely and simply as a means of avoiding tax
They did no business but were created simply as legal entities
to ostensibly receive the dividends and interest and to hand
them over to D as pretended loans.

Where it is desired to determine for tax purpose the

residence of a company, the court will lift the veil and find out
where it central management is, and that place will
determine the residence of the company. Note the following
case:
• Apthorpe v. peter schoenhofen brewing Co. Ltd., (1899) 4-
T.C. 41. an English company bought the assets and business
of an American company only as a matter of convenience.
The American company was managed by directors appointed
by the English company. Held, the American company was
the agent of the English company and the whole or its profits
2. PREVENTION OF FRAUD OR IMPROPER CONDUCT:-
The legal personality of a company may also be disregarded in the interest
of justice where the machinery of incorporation has been used to some
fraudulent purpose like defrauding creditors or defeating or circumventing
law. Prof. Grower observes in this regard that the veil of a corporate body
will be lifted where the “corporate personality is being blatantly used as a
cloak for fraud or improper conduct.” Thus in the following case where a
company was incorporated as a device to conceal the identity of the
perpetrator of the fraud, the court disregarded the corporate personality.
• Jones v. Lipman. (1962) all E.R. 442. L. Agreed to sell a certain land to J. He
subsequently changed his mind and to avoid the specific performance
against L and the company. The court looked to the reality of the situation.
ignored the transfer, and ordered that the company should convey the land
to J
3. DETERMINATION OF CHARACTER OF A COMPANY
WHETHERN IT IS ENEMY. A company may assume character
when persons in de facto control of its affairs are residents in an enemy
country. In such a case, the court may examine the character of persons in
real control of the company, and declare the company to be a enemy
company.
• Daimler Co. Ltd. V. continental tyre & rubber co. ltd., (1916) 2 A.C 307. A
company was incorporated in England for the purpose of selling in England
tyres made in Germany Company which held the bulk of shares in the
English company. The holders of the remaining shares, except one, and all
the directors were Germans, resident in Germany. During the First World
War, the English company commenced an action for recovery of a trade
dept. held, the company was an alien company and the payment of dept to
it would amount to trading with the enemy, and therefore the company was
not allowed to proceed with the action
4. WHERE THE COMPANY IS A SHAM. The courts also lift
the veil where a company is a mere cloak or sham (hoak). The
following case illustrates the point:
• Gilford Motor Co. Ltd. V. Home, (1933) Ch. 935 C.A. Horne, a
former employee of a company, was subject to a covenant not
to solicit its customers. He formed a company to carry on a
business which, if he had done so personally, would have been
a breach of the covenant. An injunction was granted both
against him and the company to restrain them from carrying on
the business. The company was described in this judgement as
“a device, a stratagem”, and as “a mere cloak or sham for the
purpose of enabling the defendant to commit a breach of his
covenant against solicitation.
5. COMPANY AVOIDING LEGAL OBLIGATIONS. Where the
use of an incorporated company is being made to avoid legal
obligations, the court may disregard the legal personality of the
company and proceed on the assumption as if no company
existed.
• Example. A and B, partners in a film, sell their business to C and
undertake not to start a similar business and not to compete
with C for a certain number of years. After some time they form
a private limited company, become the principal shareholders
and directors and start a similar business. The court may
restrain the company from carrying on the business competing
with C.
6. COMPANY ACTING AS AGENT OR TRUSTEE OF THE
SHAREHOLDERS. Where a company is acting as a agent
for its shareholders, the shareholders will be liable for the acts
of the company. It is a question of fact in each case whether
the company is acting as agent for its shareholders. There
may be an express agreement to this effect or an agreement
may be implied from the circumstances of each particular
case. Note the following case:
• F.G.Film Ltd. In re (1953) 1 All E.R. 615. An American company
financed the production of a film in India in the name of a
British company. The president of the American company held
90 per cent of the capital of the British company. The board of
trade of Great Britain refused to register the film as a British
company acted merely as the nominee of the American
7. AVOIDANCE OF WELFARE LEGISLATION. Avoidance of
welfare legislation is as common as avoidance of taxation and
approach of the courts in considering problems arising out of
such avoidance is generally the same as avoidance of taxation. It
is the duty of the courts in every case where ingenuity is
expended to avoid welfare legislation to get behind the smoke
screen and discover the true state of affair (workmen of
association rubber industry ltd. V. associated rubber industry ltd.,
(1986) 59 comp. CAS. 134 (S.C.))

8. PROTECTING PUBLIC POLICY. The courts invariable lift the

corporate veil to protect the public policy and prevent
transaction contrary to public policy. Thus where there is a
conflict with public policy, the courts ignore the form and take
into account the substance [Connors v. conners Ltd., (1940) 4 All
 STATUTORY EXCEPTIONS.
• NUMBER OF MEMBERS BELOW STATUTORY MINIMUM
(SEC 45):- If a company carries on business for more than 6
months after the number of its members has been reduced
below 7 in case of a public company or 2 in case of a private
company, every person who knows this fact and is a member
during the time that the company so carries on business after
the 6 months, is severally liable for the whole of the debts of the
company contracted during that time, i.e. after 6months. It may
be noted that in such a case the continuing members (i.e., those
who continue to be members after 6months)-

(b) Can be sued and not those who have withdrawn from the
membership;
2. FAILURE TO REFUND APPLICATION MONEY (SEC.
69(5)):- The director of a company are jointly and severally
liable to repay the application money with interest if the
company fails to refund the application money of those
applicants who have not been allocated shares, within 130days
of the date of issue of the prospectus.
3. MISDESCRIPTION OF COMPANY’S NAME (SEC
147(4)):- Where an officer or agent of a company does any act
or enters into a contract without fully or properly mentioning the
company’s name and the address of its registered office, he
shall be personally liable. Thus where a bill of exchange, hundi
or promissory note is signed by an officer of a company or any
other person on its behalf, without mentioning this fact that he is
signing on behalf of the company, he is personally liable to the
holder of the instrument unless the company has already paid
the amount. Hendon v. Alderman, (1973), 117 S.J. 631. The
4. FRAUDULENT TRADING (SEC. 542):- Sometimes in the
course of the winding up of a company it may appear that some
business of the company, or any other person or for any
fraudulent purpose. In such a case, the court may declare that
any persons who were knowingly parties to the carrying on of
the business in this debts or other liabilities of the company as
the court may direct. The court may do so on the application of
the official liquidator, or the liquidator or any creditor or
contributory of the company.

5.HOLDING AND SUBSIDIARY COMPANIES. In the eyes of

the law, the holding company and its subsidiaries are separate
legal entities. Even a 100 per cent subsidiary is a separate legal
entity and its creator and controller (i.e., the holding company)
is not liable for its breaches of contracts and torts. Nor can the
Free Wheel (India) Ltd. V. Ved Mitra, A.I.R. (1969) Delhi 258. A
holding company requested the court for restraining its subsidiary
from issuing further capital as it would depreciate the value of its
shares. The injunction prayed for was refused on the ground that
the subsidiary company had not lost its identity as a separate
legal entity.

But in the following two cases, a subsidiary company may lose its
separate identity to certain extent:-

3. Where at the end of its financial year, a company has

subsidiaries, it must lay before its members in general meeting
not only its own accounts, but also a set of group accounts
showing the profit or loss earned or suffered by the holding
company and its subsidiaries collectively, and their collective
state of affairs at the end of the year.
SALOMON VS. SALOMON CO. LTD (1897)
Mr. Salomon had his own business of boot manufacturing, etc. Since his
children wanted to be a part of the business as owners, Mr. Salomon sold
his business to the New Company (the company, he was planning to form)
for a certain amount of money (40000 pounds). He was selling his business
to the new company as he knew that the COMPANY IS SEPARATE LEGAL
ENTITY. He needed 7 members (shareholders) to form that company.

Fortunately or unfortunately, he had 5 children. 7 members were found: 5

children, 1 wife, and Mr. Salomon himself. So, he gave himself 20000
shares (1 pound each), 1 share to each child (total 5 shares for 5 children)
and 1 share to his wife. He elected his two children together with him to be
the Directors of the company. Therefore Mr. Salomon became a
SHAREHOLDER.
 But since the company still owes Mr. Salomon 20000 pounds,
the company gives him debentures of 10000 pounds and rest
10000 pounds were paid in cash, etc. Therefore he is a
SHAREHOLDER in the company, and now, a DEBENTURE
HOLDER too. But he was a DIRECTOR also. So, He was
SHAREHOLDER, DIRECTOR & DEBENTURE HOLDER.

He was an ORDINARY SHAREHOLDER who would be paid after

all the creditors are paid IF THERE IS LIQUIDATION OF THE
COMPANY.

After 1 year, the company went into Liquidation (because the

liabilities were more than assets by certain amount) and the
creditors needed to pay. The LIQUIDATOR asked Mr. Salomon to
pay all the creditors since Mr. Salomon was the OWNER of the
company. Salomon did not agree with that. Because He
 TRIAL JUDGE VAUGHAN WILLIAMS agreed with Liquidator and
asked SALOMON to pay on behalf of the company since Salomon
was the owner, but Salomon didn't agree. He appealed to
COURT OF APPEAL so that he (Salomon) didn't have to pay the
debts owed to creditors by the company. COURT OF APPEAL said
that Salomon just found 6 people (his 5 children & wife) to form
the company. Those 6 people are mere nominees of Mr.
Salomon. COURT OF APPEAL also asked Mr. Salomon to pay.

This time Salomon appealed to the highest court "HOUSE OF

LORDS".
HOUSE OF LORDS rejected all the judgments made by TRIAL
JUDGE VAUGHAN WILLIAMS, COURT OF APPEAL.HOUSE OF
LORDS said that there is neither fraud in the manner which Mr.
Salomon formed the company, nor did Mr. Salomon form the
So, Mr. Salomon did not have to pay to the COMPANY'S Creditors
since Mr. Salomon and The Company are two Separate (Legal)
Entities. The company is separate from its members....

In this case it was established that the actions of a company, are

that of the company and not of the shareholders themselves.
This is written into the Companies Act 1993 which states that “a
company is a legal entity in its own right separate from its
shareholders” (Legislative Extracts, School of Accountancy,
2001). This law separates the company as another individual
person/entity which will be held responsible for the fortunes of
the company and separates all blame from the
directors/shareholders of the company except under situations
where the veil is lifted. This will however lead to situations
where justice can not be carried out as people will commit
 IS COMPANY A CITIZEN
Although a company is regarded as a legal person(though
artificial),it is not a citizen either under the Constitution of India or
the Citizenship Act,1955-Heavy Engineering Mazdoor Union v.State
of Bihar[1969]39 Comp. CAS. 905(SC).The Supreme Court of India
in State Trading Corporation of India Ltd. V. CTO[1963]33 Comp.
CAS. 1057 held that a Corporation (including a company) cannot
have the status of a citizen under the Constitution of India. Thus,
under the Constitution; a company has no fundamental rights
which are expressly available to citizens only. It can, however,
claim the protection of those fundamental rights which are
available to all persons, whether citizens or not, for example, the
right to own property.
 In Narasaraopeta Electric Corp.. Ltd. V. State of Madras
[1951]21 Comp.Cas.297 (Mad), the High Court observed that a
company incorporated under the Indian Companies Act does not
satisfy the requirements of the definition of ‘citizen’ in Article 5
of the Constitution and therefore is not a citizen.

Similar view was upheld by the Supreme Court in the case of

State Trading Corporation of India Ltd. V. CTO[1963]33
Comp.Cas.1057(SC).The Supreme Court, in this case observed
that the rights of citizenship and the rights flowing from the
nationality or domicile of a Corporation are not coterminus.It
would thus appear that the makers of the Constitution had
altogether left out the consideration of juristic persons when
they enacted PartII of the constitution relating to citizens and
made a clear distinction between ‘persons’ and ‘citizens’ in
 PartIII,which proclaims fundamental rights was very accurately
drafted, delimiting those rights like freedom of speech and
expression, the right to assemble peacefully, the right to
practice a profession, etc, as belonging to citizens only and
those more general rights like the right to equality before the
law, as belonging to all persons. Corporation may have
nationally in accordance with the country of their incorporation;
but that does not necessarily confer citizenship on them. There
is also no doubt that Part II of the Constitution when dealing with
citizenship refers to natural persons only. This is further made
absolutely clear by the Citizenship Act which confines citizenship
to natural persons only.
 A company is also not allowed to lay claim to fundamental rights
on the basis of its being an aggregation of citizens. Once a
company or a corporation is formed, the business of the company
or corporation is not the business of the citizens but that of the
company or corporation formed as an incorporated body, and the
rights of the incorporated body must be judged on that footing and
cannot be judged on the assumption that they are the rights
attributable to the business of individual citizens-Telco Ltd. v. State
of Bihar [1964]34 Comp. CAS. 458(SC).

It should, however, be noted that certain fundamental rights

enshrined in the Constitution are for protection of any person, for
e.g., right to equality, etc (Article 40) are available to a company.
 In Chiranjilal Chaudhari v. Union of India [1951] 21 Comp. CAS.
33(SC),the Supreme Court held that the fundamental rights
guaranteed by the Constitution are available not merely to
individual citizens but to corporate bodies as well except where
the language of the provision or the nature of the right compels
the interference that they are applicable only to natural persons.

Similarly in Bennet Coleman Comp. v. Union of India[1972]

S.C.C. 788,806, the Supreme Court extended the rule by stating
“it is now clear that the fundamental rights of shareholders as
citizens are not lost when they associate to form the company.
When their fundamental rights as shareholders are impaired by
State action, their rights as shareholders are protected the
reason is that the shareholders’ rights are equally and
necessarily affected if the rights of the company are affected.