2017524 PrintArticle:LiftingofCorporateVeil:IndianScenario

LiftingofCorporateVeil:IndianScenario

Source:http://www.legalserviceindia.com
Author:AshuBala
Publishedon:July30,2015

LiftingofCorporateVeil:Indian AshuBala'sProfileand
details
Scenario
IamB.A.LL.B,
LL.M
Thedoctrineofliftingthecorporateveilmeansignoringthecorporate
natureofthebodyofindividualsincorporatedasacompany.Acompanyisajuristicperson,butin
realityitisagroupofpersonwhoarethebeneficialownersofthepropertyofthecorporatebody.
Beinganartificialperson,it(company)cannotactonitsown,itcanactonlybynaturalpersons.The
doctrineofliftingtheveilcanbeunderstoodastheidentificationofthecompanywithitsmembers.

Thecompanyisequalinlaw,tonaturalperson.ThisisoneofthecornerstonesofIndianCompany
Lawandhasbeenfollowedsince1897whenHouseofLordshandeddownitsdecisioninSalomanv.
Saloman&Co.AnimportantprincipleofsepratelegalentityhasbeenrecognizedinSaloman'scase
whichmeansacompanyhasitsownlegalpersonality,distinctfromitsmembers.Itallowsa
companytoperformjuristicactsinitsownname,aswellastosueandtobesued.Membersand
Directorsenjoyprotectionagainstpersonalliability.Althoughthisfundamentalrulehasconsiderable
influenceinCompanyLawacrosstheglobe,includingIndia,itcannotbeabsoluteandmustallow
someexceptions,wherethecourtmaydisregardthelegalpersonalityofthecompany.Such
exceptionsastherearerepresenthaphazardrefusalsbythelegislatureorthecourtstoapplylogic
whereitistoflagrantlyopposedtojustice,convenienceortheinterestoftherevenue.Theveilof
incorporationnevermeansthattheinternalaffairsofthecompanyarecompletelyconcealedfrom
view.
Ordinarily,corporatepersonalityofacompanyistoberespected.Thewholelawofcorporationsis
stillbasedonthisbasicprincipleofcorporateentity.Thereareumpteeninstancesinwhichthecourts
haveupheldedthisprincipleandresistedthetemptationtobreakthroughtheveil.Butwhenthe
benefitismisused,thecourtisnotpowerlessanditcanlifttheveilofcorporatepersonalitytoseethe
realitiesbehindtheveil.Indoingsothecourtsubservestheimportantpublicinterest,namely,to
arrestmisuseorabuseofbenefitconferredbylaw.InUnitedStatesv.MilwaukeeRefrigeratorCo.,it
washeldthat,"acorporationwillbelookeduponasalegalentityasageneralrule,butwhenthe
notionoflegalentityisusedtodefeatpublicconvenience,justify,protectfraudordefendcrime,the
lawwillregardthecorporationasanassociationofpersons.

MeaningoftheDoctrineofLiftingtheCorporateVeil
Liftingtecorporateveilmeansdisregardingthecorporatepersonalityandlookingbehindthereal
personwhoareinthecontrolofthecompany.Inotherwords,whereafraudulentanddishonestuse
ismadeofthelegalentity,theindividualsconcernedwillnotbeallowedtotakeshelterbehindthe
corporatepersonality.Inthisregardsthecourtwillbreakthroughthecorporateveil.Accordingtothe
definitionofBlackLawDictionary,"thepiercingthecorporateveilisthejudicialactofimposing
liabilityonotherwiseimmunecorporateofficers,Directorsandshareholdersforthecorporation's
wrongfulacts."Aristotlesaid,whenonetalksofliftingstatusofanentitycorporateveil,onehasin
mindofaprocesswherebythecorporateisdisregardedandtheincorporationconferredbystatuteis
overriddenotherthanthecorporateentityanactoftheentity.
Whentheprincipleisinvolved,itispermissibletoshowthattheindividualhindingbehindthe
corporationisliabletodischargetheobligationsignoringtheconceptofcorporationasalegalentity.
InDDAv.SkipperConstructionCo.Pvt.Ltd.theSupremeCourtreferredtotheprincipleoflifting

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corporateveil.Theconceptofcorporateentitywasevolvedtoencourageandpromotetradeand
commercebutnottocommitillegalitiesortodefraudpeople.Thecorporateveilindisputablycanbe
piercedwhenthecorporatepersonalityisfoundtobeopposedtojustice,convenienceandinterestof
therevenueorworkmanoragainstpublicinterest.

OriginofDoctrineofLiftingoftheCorporateVeil

Anincorporatedcompanyhasalegalentitydistinctfromitsmembersfromthedateofits
incorporation.

InEnglandthelegalpersonalityofacompanywasrecognizedin1867butitwasfirmlyestablished
in1897inthecaseofSalomanv.Saloman&Co.Ltd.InthiscaseoneSalomonwasabootand
shoemanufacturer.Hisbusinesswasinsoundconditionandtherewasasubstantialsurplusofassets
overliabilities.HeincorporatedacompanynamedSaloman&Co.Ltdforthepurposeoftakingover
andcarryingonhisbusiness.ThesevensubscriberstotheMemorandumwereSaloman,hiswife,his
daughterandfoursonsandtheyremainedtheonlymembersofthecompany.Salomanandtwoofhis
sons,constitutedtheBoardofDirectorsofthecompany.Thebusinesswastransferredtothe
companyfor40000.InpaymentSalomantook20000sharesof1eachanddebenturesworth
10,000.ThesedebenturescertifiedthatthecompanyownedSalomon10000andcreatedacharge
onthecompany'sassets.Onesharewasgiventoeachremainingmemberofhisfamily.Thecompany
wentintoliquidationwithinayear.Itsassetsamountingto6,000wereinsufficienttopaythe
debenturesinfullandtheordinarycreditorsreceivednothing.Theliquidatorsoughttohavethe
debenturescancelledonthegroundthatthecompanywasonlyanagentofSalomon.Theunsecured
creditors,ontheirpartcontendedthatthoughthecompanywasincorporatedundertheAct,the
Salomon&Co.Ltd.hadnoindependentexistenceanditwasinfactonlySalomonwhowasthesole
personbehindit,hewasthemanagingdirector,theotherdirectorsbeinghissonswereunderhis
control.Thus,ineffectthecompanywasonemanshowanditsexistencewascontrarytothespirit
andmeaningoftheCompanyLaw.TheSalomonandCompanyLtd.wasincorporatedcomplying
withalltheformalitieswhichwerenecessarytocorporateacompanyhavingapersonalityseparated
fromthatofitsmembersandsinceSalomonwasoneofitsmembersorshareholdershewasunder
noobligationtomeetliabilitiesofthecompany.

TheHouseofLordsrefusedtheseargumentsonthegroundthatafterincorporationtheSalomonand
Co.Ltd.becameinlawadifferentpersonaltogetherfromitsmemberswithitsownrightsand
liabilities.So,theHouseofLordshasmadeitclearthatafterincorporationacompanyisconferred
onalegalentitydifferentfromthemotivesorconductofitsmembersandpromoters.

TheHistoryofEnglishdoctrinecanbedividedintothree
stages:
a)18971966Thisperiodmaybecalledastheclassicalveilliftingortheearlyexperimentation
period,duringwhichtheEnglishcourtsexperimentedwithdifferentapproachesofthedoctrine.The
HouseofLoardsdecisioninSaloman'scasedominatedinthisperiod.

b)19661989ThisperiodstartedaftertheSecondWorldWarandthisistheinterventionistperiod.
TherulesofHouseofLordsinSaloman'scasewerechangedandtheveilliftingwasencouraged
duringthisperiod.
InLittlewoodsMailOrderStoresLtd.v.IRC,LordDenningstated,"thedoctrinelaiddownin
Saloman'scasehastobewatchedverycarefully.Ithasoftenbeensupposedtocastaveiloverthe
personalityofalimitedcompanythroughwhichthecourtscannotsee.Butthatisnottrue.Thecourts
can,andoftendo,pulloffthemask."Withofwantingofanyhypothesis,thespritofthedoctrinein
thisperiodcanbeattributedtothemostinfluentialjuristofthetwentiethcentury.

c)1989ThePresentThedoctrineofcorporateveilliftingbegantobedisfavouredbythecourtsin
thisperiod.InWoolfsanv.Strathelyedregionalcouncil,courtstatedthattheonesituationwherea
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corporateveilcouldbeliftedwaswhethertherearespecialcircumstancesindicatingthatthe
companyisa'merefacadeconcealingthetruefacts.'

ButthejudgementofthecourtofappealinAdamsVs.CapeIndustryPlcleavesonlythree
circumstanceswhenacorporateveilcanbelifted.

i)Itthecourtininterpretingastatuteordocumentandthestatuteitselfisambiguous,whichwould
allowthecourttotreatagroupasasingleentity.

ii)Ifspecialcircumstanceindicatethatitisamerefacadeconcealingthetruefacts,thecourtmaylift
theveil.

iii)Thethirdexceptionisanapplicationoftheagencyprinciple.Parentcompaniesandsubsidiaries
areunlikelyhaveexpressagencyagreementsanditisevendifficulttoproveanimpliedagency.
Evidenceisrequiredthatdaytodaycontrolwasbeingexercisedbytheparentcompanyoverits
subsidiaries.

Indianlaw

ThemostoftheprovisionsofIndiancompanylawwereborrowedfromEnglishlaw,itmoreorless
resemblestheEnglishlaw.TheSalomon'scasehasbeentheauthoritysinceinthedecisionsofthe
doctrineofIndiancompanycases.

TheSupremeCourtinTataEngineeringLocomotiveCo.Ltd.v.StateofBiharandothers,"the
corporationinlawisequaltonaturalpersonandhasalegalentityofitsown.Theentityof
corporationisentirelyseparatefromthatofitsshareholdersitbearsitsownnamesandhassealof
itsownitsassetsareseparateanddistinctfromthoseofitsmembers,theliabilityofthemembersof
theshareholdersislimitedtothecapitalinvestedbythem,similarly,thecreditorsofthemembers
havenorighttotheassetsofthecorporation."

InLICofIndiav.EscortsLtd,JusticeO.ChinnapaReddyhadstressedthatthecorporateveil
shouldbeliftedwheretheassociatedcompaniesareinextricablyconnectedastobeinreality,partof
oneconcern.AftertheBhopalGasleakdisastercase,theliftingofcorporateveilhasbeenescalated.
FurthermoreinstateofUPv.RenusagarPowerCompany,theSupremeCourtliftedtheveilandheld
thatHindalco,theholdingcompanyanditssubsidiary,Renusagarmustbetreatedastheownsource
ofgenerationofHindalcoandonthatbasis,Hindalcowouldbeliabletopaytheelectricduty.
AfterthedecisionofRenusagercase,thedoctrinehasbeenconsideredinseveralcases.

NeedoftheDoctrineofLiftingtheCorporateVeil

Thetheoryofliftingthecorporateveilbecomesnecessarywhenunscrupulouspeoplestartedusing
thecorporateveilasaninstrumenttoconcealfraudincompany'saffairs.Thus,itbecome
compulsoryforthelegislatureandcourttoevolveandtoliftthecorporateveilandfindoutthe
personbehindthecompany,whoaretheactualbeneficiariesofthecorporatebody.

InAndhraPradeshStateRoadTransportationCasetheSupremeCourtpointedoutthatacorporation
hasaseparatelegalentityissofirmlyrootedinournotionsderivedfromcommonlawthatitis
hardlynecessarytodealwithitelaborately.

ThePhilosophyBehindtheDoctrineofLiftingofCorporateVeil
TheconceptofcorporateveilisafundamentalaspectofaCompanyLaw.Thisisaprotectivedevice
forthosewhoexistbehindtheveil.Pickeringsaysthattherearetwomainreasonswhythereare
exceptionstotheseparateentitydoctrine.Firstly,hesaysthatacompanycannotallthetimesandin
allthecircumstancesbetreatedasanordinaryindependentperson,e.g.acompanyhasnomensrea
andthereforeisnotcapableofcommittingacrime,unlessthecourtliftstheveilandimposethe
intentionoftheDirectorsormembersonthecompany.Secondly,iftherewerenoexceptiontothe
separateentityrule,Directorsandmemberswouldbeallowedtohidebehindtheshieldoflimited
liability,withpotentiallydisastrouseffects.Thus,thedoctrineofliftingthecorporateveilis
essentiallyusedasaflexibletooltoensurejustice.


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Thedoctrineofliftingtheveilhasbeendevelopedasadevicetoavoidthehardshipofthedoctrineof
corporatepersonality.Itmaybeunderstoodastheidentificationofacompanywithitsmembers.In
ordertoprotectthemselvesfromtheliabilitiesofthecompanyitsmembersoftentaketheshelterof
thecorporateveils.Sometimesthesecorporateveilsareusedasavehicleoffraud,orevasionoftax.
Topreventunjustandfraudulentacts,itbecomesnecessarytolifttheveilstolookintotherealities
behindthelegalfacadeandtoholdtheindividualmemberofthecompanyliableforitsacts.The
corporateveilhasbeenliftedbythecourtsandlegislaturesbothfortheinterestofequity,justiceand
goodconscience.

DoctrineLawliftingthecorporateveilassuchisnotgiveninthetextofIndianCompanyLawbut
couldbeinferredfromnumberofprovisions.

TheCompaniesAct,1956

TheCompaniesAct1956,itselfprovidesforcircumstances,whencorporateveilwillbeliftedand
theindividualmembersordirectorswillbemadeliableforcertaintransactions.

1)ReductionofMembership:

Section45oftheActmakesthemembersofthecompanyseverallyliableforthepaymentofthe
wholedebtsofthecompanyifthemembershipofthecompanyisreducedbelowthestatutory
requirementsi.e.twofortheprivatecompanyandsevenforapubliccompany.Itmustbenotedthat
thissection45doesnotoperatetodestroytheseparatepersonalityofthecompany,itstillremainsan
existingentitythoughtheremaybeoneormoremember.However,thisprovisionappliesonlyto
memberswhoremainasmembersifthecompanycontinuouswithlessnumberforaperiodmore
than6monthsafterthemembershipfallsbelowthestatutorylimits.

2)HoldingandSubsidiaryCompany

Section212ofthecompaniesAct,1956providesthatinrelationtofinancialdisclosureatrueandfair
viewoftheoverallpositionofthegroupistobepresentedandtherefore,theparentcompanymust
presentfinancialstatementsofitssubsidiariesaswellasitsownindividualstatement,thereby
avoidinganymisleadingpicturegivenbypresentingonlythefinancialstatementoftheparent
company.However,itwouldbehighlymisleadingtoconstruethisactionaloneasresultingina
liftingofthecorporateveilasthisprovisionnowhereprovidesfortheholdingcompanybeingliable
forthedebtsofitssubsidiaries.Itssoleobjectseemstobeensuredaccurateinformationaboutthe
financesofitssubsidiaries.

3)FailuretoDeliverShareCertificate(Section113)

Subsection(2)ofSection113providesthatincaseacompanyfailstodelivertheshare/debenture
certificatewithin3monthsofallotmentandwithin2monthsofapplicationfortransfer,thenthe
companyaswellaseveryofficerofthecompanywhoisatfaultshallbepunishablewithfineupto
Rs.5000perdaytillsuchdefaultcontinues.

TheCompaniesAct2013

I.Failuretoreturnapplicationmoney(Section39)
Inthecaseofissueofsharebyacompany,whethertothepublicorbywayofrightsif,minimum
subscriptionasstatedintheprospectushasnotbeenreceiveddirectorsshallbepersonallyliableto
returnthemoneywithinterest,incaseapplicationmoneyisnotrepaidwithinaprescribedperiod.

II.Misrepresentationinprospectus(Section34and35)

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Incaseofmisrepresentationinaprospectus,everydirector,promoterandeveryotherpersonwho
authorizesuchissueofprospectusincursliabilitytowardsthosewhosubscribedforsharesonthe
faithofuntruestatement.

III.FraudulentConduct(Section339):
Whereinthecaseofwindingupofacompanyitappearsthatanybusinessofthecompanyhasbeen
carriedonwithintenttodefraudcreditorsofthecompanyoranyotherperson,orforanyfraudulent
purpose,thosewhoareknowinglypartiestosuchconductofbusinessmay,iftheTribunalthinksit
propersotodo,bemadepersonallyliablewithoutanylimitationastoliabilityforalloranydebtsor
otherliabilitiesofthecompany.

CRIMINALLIABILITYFORMISSTATEMENTSINPROSPECTUS
Whereaprospectus,issued,circulatedordistributed,includesanystatementwhichisuntrueor
misleadinginformorcontextinwhichitisincludedorwhereanyinclusionoromissionofany
matterislikelytomislead,everypersonwhoauthoritiestheissueofsuchprospectusshallbeliable
undersection447.

Providedthatnothinginthissectionshallapplytoapersonifheprovesthatsuchstatementor
omissionwasimmaterialorthathehadreasonablegroundstobelieve,anddiduptothetimeofissue
oftheprospectusbelieve,thatthestatementwastrueortheinclusionoromissionwasnecessary.

Civilliabilityformisstatementinprospectus:whereapersonhassubscribedforsecuritiesofa
companyactingonanystatementincluded,ortheinclusionoromissionofanymatter,inthe
prospectuswhichismisleadingandhassustainedanylossordamageasaconsequencethereof,the
companyandeverypersonwho
a.isadirectorothecompanyatthetimeoftheissueoftheprospectus
b.hasauthorizedhimselftobenamedandisnamedintheprospectusasadirectorofthecompany,or
hasagreedtobecomesuchdirector
c.isapromoterofthecompany
d.hasauthorizedtheissueoftheprospectus,and
e.isanexpertreferredtoinsubsection(5)ofsection26,
Shall,withoutprejudicetoanypunishmenttowhichanypersonmaybeliableundersection36,be
liabletopaycompensationtoeverypersonwhohassustainedsuchlossordamage.
Whereitisprovedthataprospectushasbeenissuedwithintendtodefraudtheapplicantsforthe
securitiesofacompanyoranyotherpersonorforanyfraudulentpurpose,everypersonreferredtoin
subsec.(1)shallbepersonallyresponsible,withoutanylimitationofliability,foralloranyofthe
lossesordamagethatmayhavebeenincurredbyanypersonwhosubscribedtothesecuritiesonthe
basisofsuchprospectus.
PunishmentforFraudulentlyInducingPersonstoInvestmoney:anypersonwho,eitherknowingor
recklesslymakesanystatement,promiseorforecastwhichisfalse,deceptiveormisleading,or
deliberatelyconcealsanymaterialfacts,toinduceanotherpersontoenterinto,ortooffertoenter
into
a.anyagreementfor,orwithaviewto,acquiring,disposingofsubscribingfororunderwriting,
securities,or
b.anyagreement,thepurposeorthepretendpurposeofwhichistosecureaprofittoanyofthe
paritiesfromtheyieldofsecuritiesorbyreferencetofluctuationinthevalueofsecuritiesor
c.anyagreementfor,orwithaviewto,obtainingcreditfacilitiesfromanybankorfinancial
institutions,
shallbeliableforactionundersection447.

IV.MissdescriptionofName:whereanofficerofanycompanysignsonbehalfofcompanyany
contract,billofexchange,chequepromissorynoteetc.suchpersonshallbepersonallyliabletothe
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holderifthenameofthecompanyisnotmentionedornotproperlymentioned.

Everypersonshallhaveitsnameprintedonhundies,promissorynotes,billofexchangeandsuch
otherdocumentsasmaybeprescribed.

Ifanydefaultismadeincomplyingwiththerequirementstothissection,thecompanyandevery
officerwhoisindefaultsshallbeliabletoapenaltyofonethousandrupeesforeverydayduring
whichthedefaultcontinuesbutnotexceedingonelakhrupees.

InvestigationintoaffairsofCompany:

Wherethecentralgovernmentisoftheopinion,thatitisnecessarytoinvestigateintotheaffairsofa
company

a.onthereceiptofareportofatheRegistrarorInspectorunderSec.208

b.oninformationofaspecialresolutionpassedbyacompanythattheaffairsofthecompanyought
tobeinvestigatedor
c.Inpublicinterest,

Itmayorderaninvestigationintotheaffairsofthecompany.

EstablishmentofSeriousfraudInvestigationOffice

Thecentralgovernmentshall,bynotification,establishanofficetobecalledtheSeriousFraud
InvestigationOfficetoinvestigatefraudrelatingtoacompany.

InvestigationofOwnershipofCompany

Whereitappearstothecentralgovernmentthatthereisareasonsotodo,itmayappointoneormore
inspectorstoinvestigateandreportonmattersrelatingtothecompany,anditsmembershipforthe
purposeofdeterminingthetruepersons

a.whoareorhavebeenfinanciallyinterestedinthesuccessorfailure,whetherrealorapparent,of
thecompanyor

b.Whoareorhavebeenabletocontrolortomateriallyinfluencethepolicyofthecompany.

Liabilityforfraudulentconductofbusiness:

Ifinthecourseofthewindingupofacompany,itappearsthatanybusinessofthecompanyhasbeen
carriedonwithintendtodefraudcreditorsofthecompanyoranyotherpersonsorforanyfraudulent
purpose,thetribunal,ontheapplicationoftheofficialLiquidator,orthecompanyLiquidatororany
creditororcontributoryofthecompany,may,ifitthinksitpropersotodo,declarethatanyperson,
whoisorhasbeenadirector,manager,orofficerofthecompanyoranypersonswhowere
knowinglypartiestothecaringoneofthebusinessinthemanneraforesaidshallbepersonally
responsible,withoutanylimitationofliability,foralloranyofthedebts.orotherliabilitiesof
companyasthetribunalmaydirect.

Liabilityforultraviresacts:
Directorsandotherofficersofacompanywillbepersonallyliableforthoseactswhichtheyhave
doneonbehalfofacompanyifthesameareultraviresthecompany.

MISCELLANEOUSLAWS:

TheIncomeTaxAct,1961
Undertheincometaxact,therearesomesectionwheretheprincipalofliftingofthecorporateveilis
applied.Section178appliestoacompanyinliquidation.Theliquidatorofanycompanyshallbe
personallyliablefortaxduefromthecompanyandremainingunpaidifhehasfailedtogivenotice
totheincometaxofficerhavingjurisdictiontoassessesthecompanyofthefactofhisappointment

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asliquidatorofthecompanywithin30daysofhisbecomingsuchliquidatororfailstosetaside
amountsequaltotheamountsnotifiestohimbytheincometaxofficer.TheIncomeTaxofficers
noticenotifyingtheamounttobesetapartbytheliquidatorhastoissuewithinthreemonthsof
receiptbytheincometaxofficeroftheintimationofappointmentoftheliquidator.Theliquidator
personalliabilityislimitedtotheamountnotifiedbytheIncomeTaxofficerundersection178(2)if
sonotified.Thisisstrictlynotacaseofliftingthecorporateveilbutonewherefornoncompliance
withcertainprovisionsintheI.T.Act,theliquidatorispersonallyheldliableforthetaxobligations
ofthecompanyinliquidation.Sec179(1)oftheIncomeTaxActistheoneprovisionwhichfitin
wellwiththeconceptofaliftingthecorporateveil.Itprovidesforpersonalliabilityofdirectorsofa
privatecompanyforthetaxesduefromaprivatecompanyandbecomingirrecoverablefromthe
company,inrespectoftheincomeoftheprivatecompanyforanyperiodduringwhichitwasa
privatecompany,unlessthepersonwhowasaprivatecompany,unlessthepersonwhowasadirector
duringthatperiodprovesthattheirrecoverabilitycannotbeattributedtoanygrossneglect,
misfeasanceorbreachofdutyonhispartinrelationtotheaffairsofthecompany.Thisisanegative
provisionthrowingtheonusonthedirectortoprovehisnonculpability.

Accordingtosection278,whereanoffenceundertheincomeTaxhasbeencommittedbya
company,notonlythecompany,butalsoeverypersonwho,atthetimeofcommissionoftheoffence
wasinchargedofandresponsibletothecompanyfortheconductofitsbusinesswillalsobe
personallyliabledeeminghimtobeguiltyofsuchoffenceunlessheprovesthattheoffencewas
committedwithouthisknowledgeorcouldnotbepreventedinspiteofallduediligenceexercisedby
him.Thisdoesnotinvolvetheprincipleofliftingthecorporateveilaspersonalguiltofthe
individualsisitselfproved.

ForeignExchangeRegulationAct,1973:

Sec63ofthisActdeemsguiltyforcontraventionoftheprovisionsoftheAct,everypersonin
chargeofandresponsibletothecompanyforitsaffairs.

JUDICIALAPPROACH

Thetheoryofpiercingthecorporateveilcannotbeignoredinthecircumstanceswhereinfraud,
oppressionandmisconduct,etcisrequiredtobedetectedbythecourt.Thesearethesituationswhen
thecourtwillliftthecorporateveilofthecompanywiththeviewtoexaminetheactualpersonswho
standbehindthecorporatemask.Thedoctrineofliftingtheveilisadevicewhichisdevelopedto
avoidthehardshipsofthedoctrineofcorporatepersonality.

Thecorporateveilissaidtobeliftedwhenthecourtignoresthecompanyandconcernsitselfdirectly
withthemembersormanagers.InUnionofIndiaandothersv.Playworldelectronicsprivatelimited
andanothertheSupremeCourtheldthatthelegislaturecannotbeexpectedtoenumerateeachand
everydevicewhichmaybeusedbythemembersofthecompanytoevadetaxetc.

ItisatthediscretionoftheCourtwhethertoliftthecorporateveilofthecorporationornot,because
itdependsonthedifferentsituations,butinsomecircumstancesitishighlydesirablefortheCourtto
liftthecorporateveil.Therearevarioussituationsinwhichthejudiciaryhasusedthisdoctrine.

DeterminationofthecharacteroftheCompany:
Thecorporateveilhasbeenliftedbythecourtstodeterminetheenemycharacterofacompanyin
timetowar.Thecourtwilllifttheveilforthepurposesoffindingoutthepersonwhoinreality
controlthecompany'saffairsandiftheaffairsofthecompanyarefoundtohavebeencontrolledby
enemyaliens,itwillassumeenemycharacter.

EvasionofTax:
Thecorporatedeviceisoftenusedasameansofavoidingformsoftax.Itisverydifficultforthe
legislaturetoplugallthegapsinthelawandthusthejudiciaryhastostopit.TheCourtsveryoften
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resorttoliftingoftheveilinordertofindoutthetrueintentofthecompany.

BachaF.Guzdarv.CommissionerofIncometax,Bombay,Inthiscase,theagriculturalincomewas
exemptfromtaxundertheincometaxAct.Theincomeofateacompanywasexempttotheextentof
60%asagriculturalincomeand40%wastaxedasincomefrommanufactureandsaleoftea.The
plaintiff,amemberoftheteacompanyreceivedcertainamountasdividendinrespectofsharesheld
byherinthecompany.Sheclaimedthat60%ofherdividendincomeshouldbeexemptfromthe
incometaxbeinganagriculturalincome.TheSupremeCourtrejectedtheargumentoftheplaintiff
andheldthatalthoughtheincomeinthehandsofthecompanywaspartlyagricultural,yetthesame
incomewhenreceivedbytheshareholdersasdividendcouldnotberegardedasagriculturalincome.
.CITv.AssociateClothiersLtd.inthiscaseacompanywasincorporatedbycertainassesswhoheld
allitsshares.Thereaftertheassesssoldcertainpremisestothecompany.Thequestionarosewhether
thedifferencebetweenthesellingpriceandthecostofthepropertyshouldberegardedastheprofits
receivedbytheassessesandtherefore,taxableincomebecausethetransferofthepremisesbythe
assesseswasmerelyatransferfromselftoselfanditwasnotacommercialsalefrompersonto
anotherperson,butthecontentionoftheassesseswasrejectedbytheCourtonthegroundthata
companyafterincorporationbecomesalegalpersondistrictfromitsshareholdersandthusthesaleof
thepremisesbytheassessestothecompanyshouldberegardedasasalefromoneentitytoanother
entityandthedifferencebetweenthesellingpriceandthecostofthepropertyshouldbetreatedas
thetaxableincomeinthehandsoftheassesses.

FraudorImproperConduct:
Wherethemediumofacompanyhasbeenusedforcommittingfraudandimproperconduct,courts
haveliftedtheveilandlookedattherealitiesofthesituation..InDelhiDevelopmentAuthorityv.
SkipperConstructionCompanyPvtLtd.theDDAadenteredintoacontractforconstructionona
pieceofland.Afterprolongeddelaysandproblems,theDDAhadtofinallyordertheconstruction
companytostoptheconstructionandhandoverthelandtoDDA.ThecompanyinspiteofaCourt
ordertothiseffect,hadalreadycollectedvariousmoniesfromparties,agreeingtosellthespaceand
hadinfact,soldthesamespacetomorethanonepartyinthesituations.TheSupremeCourtstated
thatthiswasafitcaseforliftingofthecorporateveilandtheveilmustbeliftedwhenthedeviceof
incorporationisbeingusedforsomeillegalorimproperpurpose.TheCourtthusfoundthe
individualmembersbehindthecorporatebodyliablefortheactsthattheyattemptstocarryon
throughtheguiseofthecompany.

AvoidanceofWelfareLegislation:
Whereitwasfoundthatthesolepurposefortheformationofthenewcompanywastouseitasa
devicetoreducetheamounttobepaidbywayofbonustoworkmen,thesupremecourtupholdthe
piercingoftheveiltolookattheretranslation.

InCasesofEconomicOffences:
InSantanuRayv.UnionofIndia,itwasheldthatincaseofeconomicoffencesaCourtisentitledto
lifttheveilofcorporateentityandpayregardtotheeconomicrealitiesbehindthelegalfacade.In
thiscase,itisallegedthatthecompanyhadviolatedsection11(a)ofthecentralexcisesandsaltact,
1944.TheCourtheldthattheveilofcorporateentitycouldbeliftedbyadjudicatingauthoritiessoas
todetermineastowhichofthedirectorswasconcernedwiththeevasionoftheexcisedutybyreason
offraud,concealmentorwillfulmisstatementorsuppressionoffactsorcontraventionofthe
provisionsoftheactandtherulesmadethereunder.

Agency:
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2017524 PrintArticle:LiftingofCorporateVeil:IndianScenario

Accordingtothisclassification,theCourtsexaminewhetherornotthecompanyisactingasanagent
ofsomeofitsshareholdersorothermembersofthecompany.Insuchasituationstheveilmaybe
liftedtomakethesepersonsliableforthecompaniesacts.

InSmithStoneandknightv.BirminghamCorporation,acompanyrequiredapartnershipconcernand
registereditasacompanyandcontinuedtocarryontheacquiredbusinessassubsidiarycompany.
Theparentcompanyheldallthesharesexceptfivewhichwereheldintrustforthecompanybyits
directors.WhentheBiriminghamcorporationcompulsorilyacquiredthepremisesforthesubsidiary,
theparentplaintiffcorporationclaimedcompensation.Thecontentionfortherespondent,however
wasthattheproperpartyforclaimingcompensationwasthesubsidiaryandnottheparent
corporationastheyweretwoseparatelegalentities.TheCourtheldthatthesubsidiarycompanywas
nothingmorethananagentoftheparentcompany,andthereforealltheactsofthesubsidiarywere
attributabletotheparentcompany.Thesubsidiary,notoperatinginitsownbehalfbutonthattothe
parentwassufficientreasonfortheparenttoclaimcompensationonbehalfofthesubsidiary.Thus
thoughtheseparatelegalentityofthesubsidiarywasrecognised.Theagencyprinciplewasapplied
toidentifytheparentcompanyastheprincipleandthesubsidiaryasits.

Conclusion

Thestudyfindsthat,thisdevicemerelyseekstostrikeabalancebetweentheinterestofthepublic
andtheconceptofaseparatepersonality.Thusthedeviceisessentiallyusedasaflexibletoolto
ensurejustice.Itwouldbedefeattheobjectofthedeviceifitweretobeappliedrigidlywithno
scopeatallleftforjudicialdiscretion.Therecanbenosingleunifyingprinciplethatunderlinesthe
decisionsoftheCourts.AlthoughonadhocexplanationmaybeofferedbyaCourtwhichsodecides,
thereisnoprincipleapproachtobederivedfromtheauthorities.Thusitisnotpossibletoevolvea
rational,consistentandinflexibleprinciplewhichcanbeinvokedindeterminingthequestionasto
whethertheveilofcorporationshouldbeliftedornot.CourtsandLegislaturemustadoptasingleset
ofstatutorystandardsastowhenlimitedliabilityshouldbedisregarded.Thiswillprovidethe
certaintyinthisareaoflawandwillallowuniformity,applyingthedoctrineofliftingthecorporate
veil.

#1897,AC22(HL)

#ShashankBijapurandTulikaSinha,"PiercingtheCorporateVeil,APrimer"Vol.3KLJ1(2008)
#L.C.B.Gower,"PrincipleofModranCompanyLaw"189(3rdedn,1969)
#Ibid

#N.D.Kappoor,"ElementsofCompanyLaw"7(12thedn,1983)
(1905)142Fed.247

www.lawteacher.net/freelawessays/business/law/articleonliftingofthelawessyas.phpvisitedon
932015at3:15

#Blacklawdictionary1168(7thed1999)alsoseewww.legalindia.in/liftingthecorporateveilthe
englishandIndialaws/visitedon9.3.2015at3:20P.M.

#P.M.Bakshi,"Liftingthecorporateveil."CIJ,vol.1,1989,p.2
#AIR1996SC2005
#(1897)A.C.22
#Ibid.

#DrN.VPranjapeCompanyLawinIndiap.40(1stedn,1995)
#KailashRai,PrincipleofCompanyLawp.27(3rdedn,1985)
#Ibid.

#Availableathttp://www.legalindia.in/liftingthecorporateveiltheenglishandIndianlaw/last
accesedon18/9/2014at4:50PM
#(1969)3AIIER855
#(1978)SLT157
#(1990)2WLR657
#Supranote16
#AIR1965SC40

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2017524 PrintArticle:LiftingofCorporateVeil:IndianScenario

#(1986)1SCC264

#(1991)70comp.Cas.127
#AIR1964SC1486
#SupraNote14atp.30
#Idat29.

#SupraNote14

#Section45ofCompaniesAct1956.

#Balancesheetofholdingcompanytoincludecertainparticularsastoitssubsidiaries.
#Supranote2atp.4.
#Ibid.

#Limitationoftimeforissueofcertificate

#A.K.MajumdarandG.K.Kapoor,Companylawandpractice,p.29(1stedn,2005)
#Seesec39(AllotmentofSecuritiesbycompany).

#Sec.2(70)Prospectusmeansanydocumentdescribedorissuedasaprospectusandincludesared
herringprospectusreferredtoinSec.32orshelfprospectusreferredtoinsection31oranynotice,
circular,advertisementorotherdocumentinvitingoffersfromthepublicforthesubscriptionor
purchaseofanysecuritiesofabodycorporate.

#G.K.KapoorandSanjayDhamija,"companyLaw"12(17thedn.,2014)
#Section34ofTheCompaniesAct,2013.
#IbidSection35(1)
#Ibid,section35(2)
#Ibid,section36.

#IbidSection12(3)(d)
#IbidSection12(8)
#IbidSection210(1)
#IbidSection211
#IbidSection216

#IbidSection339(1)
#Supranote33

#Sec.178ofincomeTaxAct,1961alsoseeR.Kannan,TearingthecorporateveilSecII,
taxation(Aug,1982),P58.
#ibidSection179(1)
#ibidSection278
#ibid

#Sec63ofForeignExchangeRegulationAct1973

#Dr.S.C.Tripathi,"Modrencompanylaw",p.27(3rdedn2008)
#Supranote1atp.27
#Supranote13atp.23
#(1989)3sec181
#Supranote52

#Supranote14atp.30.
#SupraNote2atp.6
#AIR1955SC74.
#AIR,1963Cal629
#Supranote33atp.30
#AIR1996SC2005

#(1989)65compcas.196(Delhi)
#Supranote2

#(1930)2AllER116

#IncomeTaxcommissionerV.associateclothiersltd.AIR1963Cal.629

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