Lifting Of Corporate Veil

April 8, 2015 by kanchi Leave a Comment

By Vasundhara Majithia, Yamini Rajora, National Law University Jodhpur
Editors Note: The fundamental attribute of corporate personality, from which
all other consequences flow if that the corporation is a legal entity distinct from
its members.This doctrine has been established for business efficacy, necessity
and convenience. In the doctrine of Lifting the Corporate Veil, the law goes
behind the mask or veil of incorporation in order to determine the real person
behind the mask of a company. It is one of the most widely used doctrines to
decide when a shareholder or shareholders will be held liable for obligations of
the corporation and continues to be the most litigated and most discussed
doctrines in all of corporate law. Therefore, a study of the same through the lens
of leading case laws and judgements as done by the authors would be highly
beneficial.
Introduction
Corporate personality has been described as the most pervading of the
fundamental principles of company law. It constitutes the bedrock principle
upon which company is regarded as an entity distinct from the shareholders
constituting it. When a company is incorporated, it is treated as a separate legal
entity distinct from its promoters, directors, members, and employees; and
hence the concept of the corporate veil, separating those parties from the
corporate body, has arisen. The issue of lifting the corporate veil has been
considered by courts and commentators for many years and there are instances
in which the courts have deviated from the strict application of this doctrine. This
doctrine has been established for business efficacy, necessity and convenience.
In the doctrine of Lifting the Corporate Veil, the law goes behind the mask or
veil of incorporation in order to determine the real person behind the mask of a
company. One of the main motivations for forming a corporation or company is
the limited liability it offers its shareholders. By this doctrine of limited liability, a
shareholder can only lose only what he or she has contributed as shares to the
corporate entity and nothing more.
But for clarity as to Lifting of the Corporate Veil, an understanding of the
corporate personality of a company is required, along with study of the
provisions of Indian law that pave the way for courts to pierce the corporate veil.
In this project, we have attempted to study and analyze the concept of separate
legal entity, the various grounds for piercing of the corporate veil and elements
of lifting of corporate veil analyzed through the lens of leading case laws and
judgements.
The Legal personality of a Company
The fundamental attribute of corporate personality, from which all other
consequences flow if that the corporation is a legal entity distinct from its
members. Hence, it is capable of enjoying rights and of being subjects to duties
which are not the same as those enjoyed or borne by its members. In other
words, it has a legal personality and is often described as an artificial person in
contrast with a human being, a natural person.[i] For centuries, there was a
heated controversy over the applicability of the doctrine of separate legal entity
and further to limit the theory of limited liability which is often metaphorically
termed as lifting the corporate veil.[ii] It has also been defined as piercing the
corporate veil: the judicial act of imposing liability on otherwise immune
corporate officers, directors, and shareholders for the corporations wrongful
acts.[iii]
Corporate personality became an attribute of the normal joint stock company
only at a comparatively late stage in its development, and it was not
until Solomon v. Solomon & Co.[iv] at the end of the nineteenth century that its
implications were fully grasped even by the courts. Solomon had for many years
carried on a sole trader a prosperous business as a leather merchant. In 1892, he
decided to convert it into a limited company and for this purpose Solomon & Co.
Ltd. was formed by Solomon, his wife and five of his children as members and
Solomon as managing director. The company purchased the business as a going
concern for 39,000 which was a sum which represented the expectations of a
fond owner rather than anything that can be called businesslike or a reasonable
estimate of value. The price was satisfied by 10,000 in debentures, conferring a
charge over all the companys assets, 20,000 in fully paid 1shares and the
balance in cash. The result was that Solomon held 20,001 of the 20,007 shares
issued and each of the remaining six shares was held by a member of his family
each, apparently as a nominee for him. The company almost immediately ran
into difficulties and only a year later the then holder of debentures appointed a
receiver and the company went into liquidation. Its assets were sufficient to
discharge the debenture but nothing was left for the unsecured creditors. In
these circumstances, Vaughan Williams J. and a strong Court of Appeal held that
the whole transaction was contrary to the true intent of the Companies Act and
that the company was a mere sham, and an alias, trustee or nominee for
Solomon who remained the real proprietor of the business. As such, he was liable
to indemnify the company against its trading debts. But the House of Lords
unanimously reversed this decision. They held that the company has been validly
formed since the Act merely required seven members holding at least one share
each. It said nothing about their independent, or that they should take a
substantial interest in the undertaking, or that they should have a mind and will
of their own, or that there should be anything like a a balance of power in the
constitution of the company. Hence, the business belonged to the company and
not to Solomon and Solomon was its agent. Thus, this case established that
provided the formalities of the Act are complied with, a company will be validly
incorporated, even if it is a one person company and the courts will be
reluctant to treat a shareholder as personally liable for the debts of the company
by piercing the corporate veil. Thus, the court held that there was no fraud since
the shareholders were fully conversant with what was being done.
As most of the provisions of Indian Law were borrowed from the English Law, it
more or less resembles the English Law. Solomons case has been the authority
ever since in the decisions of the doctrine in Indian company cases.
Likewise, in Macaura v. Northern Assurance Co. Ltd.[v] the House of Lords
decided that insurers were not liable under a contract of insurance on property
that was insured by the plaintiff but owned by a company in which the plaintiff
held all the fully-paid shares. The House of Lords held that only the company as
the separate legal owner of the property, and not the plaintiff, had the required
insurable interest. The plaintiff, being a shareholder, did not have any legal or
beneficial interest in that property merely because of his shareholding. Support
for the doctrine has been exhibited more recently in Lee v. Lees Air Farming[vi].
The Privy Council held that Lee, as a separate and distinct entity from the
company which he controlled, could be an employee of that company so that
Lees wife could claim workers compensation following her husbands death.
The Supreme Court in Tata Engineering Locomotive Co. Ltd v. State of Bihar &
Ors.[vii]stated: the corporation in law is equal to a 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 some
of the cases, judicial decisions have no doubt lifted the veil. Gower has
summarized the position with the observation that in a number of cases the
legislature has rented in many respects, the veil woven by Solomons case.
According to Gower, the courts have only construed the statutes as cracking
open the corporate shell when compelled to do so by the clear words of the
statute. Thus, even in India it can be seen that at present, the consensus is that
cracking open the veil is somewhat cautious and circumspect.
Lifting the Corporate Veil
Piercing or lifting the veil is corporate laws most widely used doctrine to decide
when a shareholder or shareholders will be held liable for obligations of the
corporation. It continues to be one of the most litigated and most discussed
doctrines in all of corporate law.[viii]
The term piercing the corporate veil has also been described as, the Courts
unwillingness to permit corporate presence and action to divert judicial course of
applying law to ascertain facts. [ix] 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.
Generally, an incorporated company is liable as a juristic person. It is different
from its shareholders and Board of directors 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. When the corporate veil is
lifted/pierced, it only means that the Court is assuming that the corporate entity
of a concern is a sham to perpetuate the fraud, to avoid liability, to avoid effect
of statute and to avoid obligations under a contract.[x]
In Skipper Construction Company (Private) Ltd. [xi], the Supreme Court referred to
the principle of lifting corporate veil. After referring Palmers Company Law as
well as Modern Company Law by Gower, it was observed as under:-
The concept of corporate entity was evolved to encourage and promote trade
and commerce but not to commit illegalities or to defraud people. The corporate
veil indisputably can be pierced when the corporate personality is found to be
opposed to justice, convenience and interest of the revenue or workman or
against public interest.
In LIC of India v. Escorts Ltd.[xii], 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[xiii], the Supreme court lifted the
veil and held that Hindalco, the holding company and its subsidiary, Renusagar
company should be treated as one concern and that the Power Plant of
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. After the decision in
Renusagar case, the doctrine has been considered in several other cases.
In Trustor AB v. Smallbone (No.2)(2001)[xiv], the Vice-Chancellor concluded;
Companies are often involved in improprieties. Indeed there was some
suggestion to that effect in Solomon. But it would make undue roads into the
principle of Solomon if an impropriety not linked to the use of the company
structure to avoid or conceal the liability of it if the company was used as a
device or facade to conceal the true facts thereby avoiding or concealing any
liability of those individuals.
Just as in the case of Jones v. Lipman[xv] the corporation must be the device
through which the impropriety is conducted, impropriety alone will not suffice.
The Grounds for Lifting of Corporate Veil
As early as Solomon, judgments have indicated possible exceptions to the
separate entity concept. Lord Halsbury recognised the separate entity providing
there was no fraud and no agency and if the company was a real one and not a
fiction or myth. As noted by Lord Denning in Littlewoods Mail Order Stores Ltd.
v. IRC,[xvi] 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.
The circumstances under which the Courts may lift the corporate veil may
broadly be grouped under the following two heads:
(a) Under statutory provisions
When membership is reduced

Under section 45 of the Companies Act, when the number of members of a

company are reduced below 7 in case of a public company and below 2 in case
of a private company and the company continues to carry on its business for
more than 6 months while the number is so reduced, every person who is a
member of such company, knows this fact, is severally liable for the debts of the
company contracted during that time.
Improper use of Name

Section 147(4) provides that an officer of a company who signs any Bill of
Exchange, Hundi, Promissory note, cheque, wherein the name of the company is
not mentioned in the prescribed manner, such officer shall be held personally
liable to the holder of such Bill of exchange, hundi, promissory note or cheque as
the case may be; unless it is duly paid by the company.
Fraudulent conduct
If in the course of winding up of a company, it appears that any business of the
company has been carried on with the intent to defraud the creditors of the
company or any other person or for any other fraudulent purpose, the persons
who were knowingly parties to the carrying on of the business, in the manner
aforesaid, shall be personally liable for all or any of the debts or other liabilities
of the company, as the court may direct.[xvii]
Failure to refund application money

The directors 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 allotted shares within 130 days
from the date of issue of the prospectus.[xviii]However, this does not in any way
affect the very existence of the company or indeed its subsequent independent
personality and other features.
Misrepresentation in prospectus

In case of misrepresentation in a prospectus, every director, promoter and every

other person, who authorizes such issue of prospectus incurs liability towards
those who subscribed for shares on the faith of untrue statement.[xix] Besides,
these persons may be charged criminally and fined upto Rs. 50,000 or
imprisoned upto two years or may be fined as well as imprisoned.[xx]
Holding Subsidiary companies

A holding company is required to disclose to its members the accounts of the

subsidiaries. Every holding company is supposed to attach to its balance sheet,
copies of the balance sheet, profit and loss account, directors report and
auditors report etc. in respect of each subsidiary company.[xxi] It amounts to
lifting of the corporate veil because in the eyes of law a subsidiary company is a
separate legal entity and through this mechanism their identity is known.
For facilitating the task of an inspector to investigate the affairs of the
company
If it is necessary for the satisfactory completion of the task of an inspector
appointed to investigate the affairs of a company for alleged mismanagement, or
oppressive policy towards its members, he may investigate into the affairs of
another related company in the same management or group.[xxii]
For investigation of ownership

The Central Government may appoint one or more inspectors to investigate and
report on the membership of any company for the purpose of determining the
true persons who are financially interested in the company and who control its
policy or materially influence it.
Liability for ultra vires acts

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.
(b) Under judicial interpretations
 Protection of revenue

In Sir Dinsaw Maneckjee Petit, the assessee was a millionaire earning a huge
income by way of dividend and interest. He formed four private companies and
transferred his investments to each of these companies in exchange for their
shares. The dividends and interest income received by the company was handed
back to Sir Dinshaw as a pretend loan. It was held that the company was formed
by the assessee purely as a means of avoiding tax and companies thus formed
were nothing more than the assesee himself. It did no business and was created
as a legal entity simply to extend pretend loans to Sir Dinshaw. In the case of CIT
v. Sri Meenakshi Mills Ltd.,[xxiii] where the veil had been used as means of tax
evasion, the court upheld the piercing of the veil to look at the real transaction.
Prevention of fraud or improper conduct

Where the medium of a company has been used for committing fraud or
improper conduct, courts have lifted the veil and looked at the reality of the
situation. The two classic cases of the fraud exception are Gilford Motor
Company Ltd v. Horne[xxiv] and Jones v. Lipman. In the first case, Mr. Horne was
an ex-employee of The Gilford motor company and his employment contract
provided that he could not solicit the customers of the company. In order to
defeat this he incorporated a limited company in his wifes name and solicited
the customers of the company. The company brought an action against him. The
Court of appeal was of the view that the company was formed as a device, a
stratagem, in order to mask the effective carrying on of business of Mr. Horne.
In this case it was clear that the main purpose of incorporating the new
company was to perpetrate fraud. Thus the court of appeal regarded it as a
mere sham to cloak his wrongdoings. In the second case of Jones v. Lipman a
man contracted to sell his land and thereafter changed his mind in order to avoid
an order of specific performance he transferred his property to a company.
Russel J specifically referred to the judgments in Gilford v. Horne and held that
the company here was a mask which (Mr. Lipman) holds before his face in an
attempt to avoid recognition by the eye of equity he awarded specific
performance both against Mr. Lipman and the company.
Determination of the enemy character of a company

In times of war the court is prepared to lift the corporate veil and determine the
nature of shareholding as it did in the Daimler Co. Ltd. v. Continental Tyre and
Rubber Co.,[xxv] where a company was incorporated in London for the purpose
of selling German tyres manufactured by a German company. Its majority
shareholders and all its directors were German. The English Courts held it to be
an enemy company on lifting the veil and trading with this company was held to
amount to trading with the enemy.
Group enterprises

Sometimes in the case of group of enterprises the Solomon principal may not be
adhered to and the court may lift the 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[xxvi] it has been said that the courts may
disregard Solomons case whenever it is just and equitable to do so. The court of
appeal thought that the present case where it was one suitable for lifting the
corporate veil. Here the three subsidiary companies were treated as a part of the
same economic entity or group and were entitled to compensation. Lord Denning
has remarked that we know that in many respects a group of companies are
treated together for the purpose of accounts, balance sheet, and profit and loss
accounts. The nature of shareholding and control would be indicators whether
the court would pierce the corporate veil. The House of Lords in the above
mentioned case had remarked properly applied the principle that it is
appropriate to pierce the corporate veil only where special circumstances exist
indicating that it is a mere facade concealing the true facts In the figurative
sense facade denotes outward appearance especially one that is false or
deceptive and imports pretence and concealment. That the corporator has
complete control of the company is not enough to constitute the company as a
mere facade rather that term suggests in the context the deliberate concealment
of the identity and activities of the corporator. The separate legal personality of
the company, although a technical point is not a matter of form it is a matter
of substance and reality and the corporator ought not, on every occasion, to be
relieved of the disadvantageous consequences of an arrangement voluntarily
entered into by the corporator for reasons considered by the corporator to be of
advantage to him. In particular the group enterprise concept must obviously be
carefully limited so that companies who seek the advantages of separate
corporate personality must generally accept the corresponding burdens and
limitations.
Where a company acts as an agent for its shareholders

Where a company is acting as agent for its shareholder, 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 an 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. In the case of R.G. Films Ltd.[xxvii], 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 film. Held, the decision was valid in view of the fact
that British company acted merely as he nominee of the American Company.
In case of economic offences

In Santanu Ray v. Union of India,[xxviii]it was held that in case of economic

offences, a court is entitled to lift the veil and pay regard to the economic
realities behind the legal faade.
Where Company is a sham or cloak

When the court finds that company is a mere cloak or sham and is used for some
illegal or improper purpose, it may lift veil. In the leading case of P.N.B. Finance
v. Shital Prasad[xxix], where a person borrowed money from a company and
invested it into three different companies, the lending company was advised to
bring together the assets of all the three companies, as they were created to do
fraud with the lending company. The meaning of a sham was defined by
Diplock LJ in Snook v London and West Riding Investments Ltd.[xxx], thus: it
means acts done or documents executed by the parties to the sham which are
intended by them to give to third parties or to the court the appearance of
creating between the parties legal rights and obligations different from the actual
legal rights and obligation (if any) which the parties intend to create.butfor
acts or documents to be a sham, with whatever legal consequences follow
from this, all the parties thereto must have a common intention that the acts or
documents are not to create the legal rights and obligations which they give the
appearance of creating
Elements of a piercing claim
Control and domination

Control and determination part of the test determines the relationship between
the shareholder and the corporation. Generally, mere majority stock ownership
will be insufficient to satisfy this element. Instead, one must show complete
domination, not only of finances, but of policy and business practice in respect to
the transaction attacked so that the corporate entity as to this transaction has no
separate mind, will or existence of its own. To determine the existence of
complete domination, courts usually require the plaintiff to produce evidence
of inadequate capitalization or undercapitalization, failure to follow corporate
formalities, commingling of funds, diversion of funds or assets for non-corporate
purposes.[xxxi]
Improper purpose or use

This test requires the plaintiff to show that the control exercised by the parent
company or dominant stockholder was used by the defendant to commit fraud
or wrong, to perpetrate the violation of a statutory or other positive legal duty, or
dishonest and unjust act in contravention of plaintiffs legal right. This inquiry
focuses on the relationship between the plaintiff and the corporation. It is an
explicit recognition that some improper conduct must have occurred,
establishing that the corporation was controlled and dominated.[xxxii]
Resulting damage or harm

In this test the plaintiff must show that the defendants control, exerted in a
fraudulent, illegal or otherwise unfair manner toward it, caused the harm
suffered. In other words, the plaintiff must prove that, unless the corporate veil is
pierced, it will have been treated unjustly by the defendants exercise of control
and improper use of the corporate form and, thereby, suffer damages.[xxxiii]
Prosecution of Corporate Entities
Corporations play a significant role not only in creating and managing business
but also in common lives of most people. That is why most modern criminal law
systems foresee the possibility to hold the corporation criminally liable for the
perpetration of a criminal offence. The doctrine of corporate criminal liability
turned from its infancy to almost a prevailing rule. [xxxiv]
In India, the need for industrial development has led to the establishment of a
number of plants and factories by the domestic companies and under-takings as
well as by Transnational Corporations. Many of these industries are engaged in
hazardous or inherently dangerous activities which pose potential threat to life,
health and safety of persons working in the factory, or residing in the
surrounding areas. Though working of such factories and plants is regulated by a
614 number of laws of our country, there is no special legislation providing for
compensation and damages to outsiders who may suffer on account of any
industrial accident.[xxxv]
Criminal Liability of Corporations: Pre-Standard Chartered Bank Case
Law
Earlier, Indian courts were of the opinion that corporations could not be
criminally prosecuted for offenses requiring mens rea as they could not possess
the requisite mens rea. Mens rea is an essential element for majority, if not all, of
offenses that would entail imprisonment or other penalty for its violation. Indian
courts held that corporations could not be prosecuted for offenses requiring a
mandatory punishment of imprisonment, as they could not be imprisoned.
In A. K. Khosla v. S. Venkatesan[xxxvi], two corporations were charged with having
committed fraud under the IPC. The Magistrate issued process against the
corporations. The Court in this case pointed out that there were two pre-
requisites for the prosecution of corporate bodies, the first being that of mens
rea and the other being the ability to impose the mandatory sentence of
imprisonment. A corporate body could not be said to have the necessary mens
rea , nor can it be sentenced to imprisonment as it has no physical body.
In Kalpanath Rai v State (Through CBI)[xxxvii], a company accused and arraigned
under the Terrorists and Disruptive Activities Prevention (TADA) Act, was alleged
to have harbored terrorists. The trial court convicted the company of the offense
punishable under section 3(4) of the TADA Act. On appeal, the Indian Supreme
Court referred to the definition of the word harbor as provided in Section 52A
of the IPC and pointed out that there was nothing in TADA, either express or
implied, to indicate that the mens rea element had been excluded from the
offense under Section 3(4) of TADA Act.
There is uncertainty over whether a company can be convicted for an offence
where the punishment prescribed by the statute is imprisonment and fine. This
controversy was first addressed in MV Javali v. Mahajan Borewell & Co and
Ors[xxxviii] where the Supreme Court held that mandatory sentence of
imprisonment and fine is to be imposed where it can be imposed, but where it
cannot be imposed ,namely on a company then fine will be the only punishment.
In Zee Tele films Ltd. v. Sahara India Co. Corp. Ltd [xxxix], the court dismissed a
complaint filed against Zee under Section 500 of the IPC. The complaint alleged
that Zee had telecasted a program based on falsehood and thereby defamed
Sahara India. The court held that mens rea was one of the essential elements of
the offense of criminal defamation and that a company could not have the
requisite mens rea. In another case, Motorola Inc. v. Union of India[xl], the
Bombay High Court quashed a proceeding against a corporation for alleged
cheating, as it came to the conclusion that it was impossible for a corporation to
form the requisite mens rea, which was the essential ingredient of the offense.
Thus, the corporation could not be prosecuted under section 420 of the IPC.
Standard Chartered Bank Case Law
This is the landmark case in which the apex court overruled the all other laid
down principles. In this case, Standard Chartered Bank was being prosecuted for
violation of certain provisions of the Foreign Exchange Regulation Act, 1973.
Ultimately, the Supreme Court held that the corporation could be prosecuted and
punished, with fines, regardless of the mandatory punishment required under the
respective statute.
The Court did not go by the literal and strict interpretation rule required to be
done for the penal statutes and went on to provide complete justice thereby
imposing fine on the corporate. The Court looked into the interpretation rule that
that all penal statutes are to be strictly construed in the sense that the Court
must see that the thing charged as an offence is within the plain meaning of the
words used and must not strain the words on any notion that there has been a
slip that the thing is so clearly within the mischief that it must have been
intended to be included and would have included if thought of. [xli]
Justice Paranjape had stated[xlii]:
the question whether a corporate body should or should not be liable for
criminal action resulting from the acts of some individual must depend on the
nature of the offence disclosed by the allegations in the complaint or in the
charge-sheet, the relative position of the officer or agent, vis-a-vis, the corporate
body and the other relevant facts and circumstances which could show that the
corporate body, as such, meant or intended to commit that act
The Supreme Court also pointed out that, as to criminal liability, the FERA statute
does not make any distinction between a natural person and corporations.
Further, the Indian Criminal Procedure Code, dealing with trial of offenses,
contains no provision for the exemption of corporations from prosecution when it
is difficult to sentence them according to a statute. The court held that the FERA
statute was clear: corporations are vulnerable to criminal prosecution, and
allowing corporations to escape liability based on the difficulty in sentencing
would do violence to the statute. The Court did not develop its reasoning far
enough so as to specifically hold that a corporation is capable of forming mens
rea and acting pursuant to it. However, the Court held that corporations are
liable for criminal offenses and can be prosecuted and punished, at least with
fines. Many of the offenses, punishable by fines, however do have mens rea as a
necessary element of the offense. By implication, it can be said that post
Standard Chartered decision, corporations are capable of possessing the
requisite mens rea. As in prosecution of other economic crimes, intention could
very well be imputed to a corporation and may be gathered from the acts and/or
omissions of a corporation.
Criminal Liability of Corporations: Post-Standard Chartered Bank Case
Law
There is no immunity to companies from prosecution merely because the
prosecution is in respect of offences for which punishment prescribed is
mandatory imprisonment. In Iridium India Telecom Ltd. v. Motorola Incorporated
and Ors.[xliii], the apex court held that a corporation is virtually in the same
position as any individual and may be convicted under common law as well as
statutory offences including those requiring mens rea. The criminal liability of a
corporation would arise when an offence is committed in relation to the business
of the corporation by a person or body of persons in control of its affairs and
relied on the ratio in Standard Chartered Bank Case.
The apex court held that corporations can no longer claim immunity from
criminal prosecution on the grounds that they are incapable of possessing the
necessary mens rea for the commission of criminal offences. The notion that a
corporation cannot be held liable for the commission of a crime had been
rejected by adopting the doctrine of attribution and imputation [xliv].
In another judgment in July 2011 of CBI v. M/s Blue-Sky Tie-up Ltd and Ors [xlv], the
apex court reiterated the position of law held that companies are liable to be
prosecuted for criminal offences and fines may be imposed on the companies.
International Scenario
Germany

A basic principle of German law is societas delinquere non potest, which means
that a corporate body cannot be liable for a criminal offence. The argument is
that the human element is missing and that the creation and operation of slush
funds, as well as giving bribes, are all human acts and not the acts of the
company itself.[xlvi] But Germany has developed an elaborate structure of
administrative sanctions, which includes provisions on corporate criminal liability.
These so-called Ordnungswidrigkeiten are handed down by administrative
bodies. The key provision for sanctioning the corporation is Section 30
Ordnungswidrigkeitengesetz, which calls for the imposition of fines on corporate
entities.[xlvii]
Australia

The criminal sanctions are quite high and criminal liability of a company is
recognized by the Australian Legislation [xlviii]. Moreover, the Australian legislature
has introduced criminal liability of directors.
United States and United Kingdom

For more than fifty years, most criminal law and corporate scholars in the United
States have been opposed to corporate criminal liability, arguing that it should
be eliminated or at least strictly limited[xlix]. In the US and the UK, it has been a
settled principle that corporates can be held criminally liable.
France

France had also not recognized corporate criminal liability since the French
Revolution, the new Code Pnal of 1992 makes specific mention of this concept
in section 121(2). The resistance to not including corporate criminal liability in
the criminal code had increased over the years, and in 1982 the Conseil
Constitutionnel had made it clear that the French Constitution did not prohibit
the imposition of fines on a corporation.[l]
International Conferences

The Concept of Criminal liability of Corporation is also mentioned under various

International documents. A number of conferences have dealt with the same
issues since the end of World War II. Among them are the 8th International
Conference of the Society for the Reform of Criminal Law in 1994 in Hong Kong
and the International Meeting of Experts on the Use of Criminal Sanctions in the
Protection of the Environment in Portland, in 1994. [li]
The Seventh United Nations Congress on the Prevention of Crime and the
Treatment of Offenders of 1985 in Milan mentioned that due consideration
should be given by Member States to making criminally responsible not only
those persons who have acted on behalf of an institution, corporation or
enterprise, or who are in a policy-making or executive capacity, but also the
institution, corporation or enterprise itself, by devising appropriate measures
that could prevent or sanction the furtherance of criminal activities. [lii]
In 1998, the Council of Europe passed the Convention on the Protection of the
Environment through Criminal Law, which stipulated in Article 9 that either
criminal or administrative, sanctions or measures could be taken in order to
hold corporate entities accountable.[liii]
Lifting the Corporate Veil in Taxation matters
The doctrine of piercing or lifting of the veil of a Corporate Personality makes a
change in the attitude of law as originally adopted towards the concept of
separate legal personality or entity of the corporation. In Ansuman Singh v. State
of U.P.[liv], the court held that in suitable cases, the court will lift the corporate
veil.
It may happen that the corporate personality of the company is used to commit
frauds or improper or illegal acts like tax evasion. Thus, the concept of piercing
or lifting the corporate veil holds significance. A corporate veil may be pierced
either through statutory provisions or by judicial interpretation. Piercing the
corporate veil in taxation matters is an outcome of judicial decisions. The court
has the power to disregard the corporate entity if used for tax evasion or to
circumvent tax obligation.[lv]
The veil has also been lifted after finding that a corporation is merely an adjunct,
business conduit or alter ego of another corporation or person. When the veil is
pierced, the other entity, or the directors, officers, stockholders or members of
the corporation, could be held solitarily and personally liable for corporate
obligations.[lvi]
Piercing the Veil: Indian Context
When any private company is wound up any tax assessed on the company
whether before or in course of liquidation, in respect 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 and severally be liable for payment of
tax.
A company transferred its business to another company which was not taxable,
but the company was carrying on some other business which was taxable. The
company remained liable to pay the tax applicable to such business and lifting of
Corporate Veil was permitted even in the absence of any statutory provision in
this regard.[lvii]
In the case of Richer Holding Ltd. (RHL)[lviii], the issue before the High Court was
whether RHL was obliged to withhold tax on the consideration paid for
acquisition of 60% of the shares in a UK company that held a majority stake in an
Indian Company. The High Court rejected the petition filed by RHL against the
show cause notice by the Tax Authority since it was premature it was premature
at this stage to arrive at a conclusion that there is no avoidance of tax
obligations and RHL was not liable to tax on capital gains. The High Court also
observed that it may be necessary for the Tax Authority to lift the Corporate Veil
as well as examine the extent of powers the majority shareholder had in the
interest/assets of the Indian Company to look into the real nature of the
transaction.
In Vodafone International Holdings BV v. UOI[lix] Hutchinson International (non-
resident company) held 100% shares of CGP Investments Holdings Ltd. (non-
resident company) which in turn held 67% shares in the Indian company
Hutchinson-Essar. The question which arose was, whether the income accruing to
Hutchinson as a result of the transaction could be deemed to accrue or arise in
India by virtue of Sec. 9 of the Income Tax Act. In Vodafone, the High Court
answered all issues against Vodafone. However, final and concrete conclusions
cannot be drawn as the judgment was not dealing with the taxability of the
transaction.
In Santanu Ray v. UOI[lx], it was held that in case of economic offences the court
is entitled to lift the corporate veil and pay regard to the economic realities
behind the legal faade. The court held that the veil of corporate entity could be
lifted by the adjudicating authorities so as to determine as to which of the
directors were concerned with the evasion of excise duty by reason of fraud,
concealment or wilful misstatement or contravention of the provisions of the Act.
Piercing the Veil: International Context
A corporation is a separate entity from its shareholders and is subject to taxation
separate and apart from its shareholders.[lxi] Similarly, separate corporations are
generally treated as separate entities for tax purposes, no matter how closely
they may be affiliated, as in the case of a parent and wholly owned subsidiary.
[lxii]
Only in exceptional circumstances will courts ignore the separate existence of
Corporations.[lxiii]
If a corporation was formed for a valid business reason or conducted substantial
business activities after its formation, it will be recognized for tax purposes.
[lxiv]
While the Supreme Court has intimated that and otherwise separate taxable
corporate entity may, in some circumstances, qualify as a non taxable agent of a
principal,[lxv] two perquisites must be satisfied: relations with the corporation`s
principal must not be dependent on the fact that it is owned by the principal, and
its business purpose must be carried on of normal duties of an agent. [lxvi] Where a
corporation qualifies as a non-taxable agent, shareholders may be entitled to
deduct loses sustained in transaction engaged in through the agent. [lxvii]
In the Menguito[lxviii] case, the Supreme Court stated that it considers the
following as substantial evidence that two entities are actually one juridical
taxable person:
When the owner of one directs and controls the operations of the other,
and the payments effected or received by one are for the accounts due
from or payable to the other; or
When the properties or products of one are all sold to the other, which, in
turn, immediately sells them to the public.
In this case, the sole proprietor was held liable for tax liabilities of the
corporation after finding overwhelming evidence supporting the piercing of the
corporate veil. Such evidence consists of several admissions by the sole
proprietor and his wife, and documents presented in evidence showing that the
identities of the sole proprietorship and the corporation are interchangeable.
It is also worth noting that corporate fiction is pierced not only on the basis of
fraud but also in alter-ego cases where a dummy corporation serves no business
purpose other than as a blind. In at least two cases, the Supreme Court
disregarded the veils of corporate fiction after finding that while the organization
of a separate corporation was not to perpetuate fraud, the clear intention was to
minimize taxes.
Whether or not a corporation a separate entity form the individual who created
the corporation is not the same question as whether it was an alter ego for the
purpose of piercing the corporate veil and holding the individual liable for its
taxes; and a finding of separate taxable entity does not preclude personal
assessment against the individual.[lxix]
A corporation is subject to federal corporate income tax liability as long as it
continues to do business in the corporate manner, despite the fact that its
recognized legal status under state law is voluntarily or involuntarily terminated;
[lxx]
and a valid corporation will be disregarded for federal tax purposes only after
the state has revoked its charter.[lxxi] A liquidating corporation continues its
federal tax existence so long as it retains valuable assets.
Piercing of Corporate Veil under Direct Tax Code
The new Direct Tax Code (hereafter DTC) replaced the Income Tax Act, 1961 with
effect from 1st April, 2012, the basic objective behind its enactment being
simplification of the language so as to enable better comprehension thereby
reducing the number of law suits. Significant among the provisions that it
introduced, are the provisions aimed at tackling the problem of tax avoidance
since this has been resulting in a major loss of revenue for the government.
Certain legislative amendments had been made earlier to counter this particular
problem but did not prove very effective since the tax payers found sophisticated
methods to get passed them thereby necessitating further changes.
The current Income Tax Act 1961 marks a difference between Tax avoidance
and tax evasion. Tax evasion refers to a situation where a person tries to reduce
his tax liability by deliberately suppressing the income or by inflating the
expenditure. An assessee guilty of tax evasion is punishable under the relevant
laws. On the other hand tax avoidance refers to any planning, though done
strictly according to legal requirements but destroys the basic intention of the
statute; the assessee will be punishable under such circumstances only in the
event of colourable device.[lxxii]
Conclusion
The doctrine of piercing the corporate veil is not subject to any bright line tests.
Courts have struggled for years to develop and refine their analysis of these
claims. However, each new action brings a different set of facts and
circumstances into the equation and a separate determination must be made as
to whether the plaintiff has adduced sufficient evidence of control and
domination, improper purpose, or use and resulting damage. The decision
whether to pierce the corporate veil may be assisted, at least in part, upon the
opinion of qualified experts. In particular, expert testimony would be helpful to
the trier of fact in determining whether the corporation has been adequately
capitalized for its intended purpose. Ultimately, however, the judgment whether
to disregard the corporate entity will be based upon a balancing of various
factors all or some of which are necessary but may not be sufficient to pierce the
veil.
The act of piercing the corporate veil until now remains one of the most
controversial subjects in corporate law. There are categories such as fraud,
agency, sham or facade, unfairness and group enterprises, which are believed to
be the most peculiar basis under which the Law Courts would pierce the
corporate veil. But these categories are just guidelines and by no means far from
being exhaustive.