INTRODUCTION

Since the beginning of formulation of the concept of a ‘company’ the evolutionary

growth of the definition and scope of a company has been parallel to those who run
and manage it. Even though separation of a company from its owners is a virtual
idea, it has been the underlying jurisprudential concept relating to company law.
With the beginning of ‘incorporation’ by registration in 1844 the doctrine of
limited liability has come in to play and been evolved by courts, legislature and
corporate entities alike. What put the concept of limited liability into motion was
the landmark case of Solomon v. Solomon where the House of Lords cemented the
same and laid down that company is a distinct legal person entirely different from
the members of that company.

This means the organization has life of it's own, can claim property, can sue and
be sued in it's own particular name, has ceaseless life and presence to give some
examples of the advantages of incorporation. It is a trite law that a fairly weighty
cloak is drawn between these two that can be lifted just in a set number of
conditions that appear to be fluctuating as indicated by current legal consideration.

Lifting of the corporate veil implies neglecting the corporate identity and looking
behind the genuine individual who are in the control of the organization. As such,
where a false and unscrupulous utilize is made of the lawful substance, the people
concerned won't be permitted to take shield behind the corporate identity. In this
respects the court will get through the corporate shell and apply the guideline of
what is known as "lifting or peircing through the corporate veil."

The rationale behind this is probably that the law will not allow the corporate form
to be misused or abused. In those circumstances in which the Court feels that the
corporate form is being misused it will rip through the corporate veil and expose its
true character and nature disregarding the Salomon principal as laid down by the
House of Lords. Broadly there are two types of provisions for the lifting of the
Corporate Veil- Judicial Provisions and Statutory Provisions.

In the case United States v. Milwaukee Refrigerator Transit Company[4], it was

stated “A corporation will be looked upon as a legal entity, as a general rule, and
until sufficient reason to the contrary appears; but, when the notion of legal entity
is used to defeat public convenience, justify wrong, protect fraud, or defend crime,
the law will regard the corporation as an association of persons.” Supreme Court of
India had adopted the similar thinking in the case Tata Engineering And
Locomotive Co. Ltd. vs. State of Bihar & Ors.

II. JUDICIAL PROVISIONS OR GROUNDS FOR LIFTING THE VEIL-

In spite of the fact that the Legislature has endeavored to embed various
arrangements in the Act to ensure liable individual is brought up as veil is pierced,
there are cases where Judiciary has had it's influence better and kept a watch that
no blameworthy. Following are couple of such situations where Court may with no
uncertainty lift the corporate veil:-

2.1 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
same has been classically explained by the following 2 cases.

2.1.1. Gilford Motor Company Ltd v. Horne: 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 wife's name and solicited the customers of the company.
The company brought an action against him. The Court of appeal was of the view
that 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

2.1.2Jones v. Lipman- Under no circumstances will the court allow the ant form of
abuse of the corporate form and when such abuse occurs the courts will step in and
Jennifer Payne in her article lists three aspects of fraud, which needs to be looked
at before the corporate veil can be lifted which are

 What are the motives of the fraudulent person relevant-

 Is the character of the legal obligation being evaded relevant?
 Is the timing of the incorporation of the device company relevant?

2.2 FOR BENEFIT OF REVENUE-

The Court has the power to disregard corporate entity if it is used for tax evasion or
to circumvent tax obligations

2.2.1 DinshawManeckjee Petit re: It was held that purpose of founding new
companies was simple as means of avoiding super-tax.

2.3 DETERMINATION OF ENEMY CHARACTER-

A company will not attempt to do good towards society consciously. However,
it may opt to cause damage instead.

2.3.1 Dailmer Co Ltd vs. Continental Tyres & Rubber Co Ltd. the company was
an alien company and the payment of debt to it would amount to trading
with the enemy, and therefore, the company was not allowed to proceed with
the action

2.3.2 Sivfracht vs. Van UdensScheepvart. that, if in such scenarios where a

company is suspected to be of enemy character or is proved to be of enemy
 character, then such granted monetary funds would be used as machinery to
destroy the concerned State itself. That would be monstrous and against
public policy of that concerned State.

2.4 LIABILITY FOR ULTRA-VIRES ACTS: -

Every company is bound to perform in compliance of it’s memorandum of
association, articles of association, and the Companies Act, 2013. Any action
done outside purview of either is said to be “ultra-vires” or improper or beyond
the legitimate scope. Such operations of the company can be subjected to
penalty.
2.4.1 Ashbury Railway Carriage & Iron Company Ltd v. Hector Riche. a
company entered into a contract for financing construction of railway lines,
and this operation was not mentioned in the memorandum. The House of
Lords held this action as ultra-vires and contract, null and void.

2.5 PUBLIC INTEREST/PUBLIC POLICY

Where the conduct of the company is in conflict with public interest or public
policies, Courts are empowered to lift the veil and personally hold such persons
liable who are guilty of the act. To protect public policy is a just ground for
lifting the corporate personality.

2.5.1 Jyoti Limited vs. Kanwaljit Kaur Bhasin & Anr. where it was held that
corporate veil maybe ignored if representatives of the company commit
contempt of the Court so punishment can be inflicted upon.
2.6 AGENCY COMPANIES
 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.
2.7 NEGLIGENT ACTIVITIES
In cases where subsidiary companies have been found with tainted operations,
Courts have power to make holding companies liable for actions of their
subsidiary companies as well for breach of duty or negligence on their part.

2.8 SHAM COMPANIES

The Courts also lift the veil where a company is a mere cloak or sham (hoax).

2.9 COMPANIES INTENTIONALLY 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.

III. STATUTORY PROVISIONS FOR LIFTING THE VEIL-

The Companies Act, 2013 has been integrated with various provisions which
tend to point out the person who’s liable for any such improper/illegal activity.
These persons are more often referred as “officer who is in default” under
Section 2(60) of the Act, which includes people such as directors or key-
managerial positions. Fewinstances of such frameworks are as following:
PROVISION STATUTORY DESCRIPTION
REFERENCE
Misstatement in Section 26 (9), Section punishable to furnish
Prospectus:- 34 and Section 35 of the untrue or false
Act, statements in prospectus
of the company.
Failure to return Section 39 (3) of the against allotment of
application money:- Act, securities,
Mis description of Section 4 Incorrect particulars in
Company’s name:- any documents
For investigation of Section 216 of the Act, Central Government is
ownership of company:- authorized
Fraudulent conduct:- Section 339 of the Act liable for unlawful
activities,
Delhi Development
Authority vs. Skipper
Construction Company
Inducing persons to Section 36 of the Act, person who makes false,
invest money in deceptive, misleading or
company:- untrue statements
Furnishing false Section 448 of the Act ny person makes false or
statements:- untrue statements, or
conceals any relevant or
material fact
Repeated defaults:- Section 449 of the Act, a company or an officer
of a company commits
 an offence punishable
either with fine or with
imprisonment and this
offence is being
committed again within
period of 3 years,

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 Cshartered 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 of1.

1
Asdad
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
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.

III. THE INDIAN SCENARIO- 2017

The most of the provisions of Indian company law were borrowed from English
law, it more or less resembles the English law. The Salomon's case has been the
authority since in the decisions of the doctrine of Indian company cases. With a
continuous evolution in judicial thinking in link with the evolving capitalist and
consumer centric corporate map, 2017 has already witnessed a glimpse of the
same. The following cases cement the fundamental jurisprudence relating to lifting
the veil, and still contextually provide new and relevant groundwork.

3.1 State of Karnataka and Ors. vs. Selvi J. Jayalalitha and Ors.: State of Karnataka
and Ors.: Disclosures are significant. Section 13(1) (e) of the Prevention of
Corruption Act suggests law will treat the apparent as real. If a company
purchases any property, law believes it as owner. This principle of legality is
 settled interpretation norm. Benami is the intention of the parties and often such
intention is shrouded in a thick veil which cannot be easily pierced through/ As
per Section 209 of Company Act the incorporated company has to keep proper
books of accounts of money received and expended, all sales and purchases of
goods, assets and liabilities of company at the Registered Office. When
camouflaged transactions are carried on behind the legal façade, the Court has
to lift this veil and look behind the artificial personality to identify the natural
persons operating behind the veil. Special Judge has identified four accused
tried to hide behind the corporate veil who amassed wealth during A1’s term as
the CM and it was undoubtedly established that the accused shielded the
properties acquired through illegal means, for instance, 3,000 acres of land is
parked in these shell Companies. It was chosen as leeway to enjoy and dispose
them of merely by passing a resolution. Thus, the Crime of Disproportionate
assets and conspiracy of four to commit it was proved.

3.2 Consortium of Titagarh Firema Adler, S.P.A., Titagarh Wagons Ltd. through
Authorized Signatory, West Bengal vs. Nagpur Metro Rail Corporation Ltd.,
through its General Manager (Procurement) and Ors- in the context of fraud or
evasion of legal obligations, the doctrine of "piercing the veil" or "lifting of the
corporate veil" can be applied but the said principle cannot be taken recourse to
in a matter of the present nature. Howvever if the same is done in the absence
of any kind of perversity, bias or mala fide should not be interfered with in
exercise of power of judicial review.

3.3 CRRC Corporation Ltd. vs. Metro Link Express for Gandhinagar and
Ahmedabad (MEGA) Company Ltd. (15.05.2017 - SC) : MANU/SC/0633/2017
the Respondent could not have been regarded as a single entity and, in any case,
it could not have claimed the experience of its subsidiaries because no
consortium or joint venture with its subsidiaries was formed. It was agreed that
Respondent as the owner of the subsidiary companies including their assets and
liabilities, cannot claim their experience and there was necessity to apply the
principle of "lifting the corporate veil",

3.4
CONCLUSION
In recent times the plague of tax evasion has been so severe that the Courts have
actively used the doctrine of piercing of corporate veil to probe into
transactions and decide the actual entities responsible behind the facade of the
company. Lately, the Hon’ble Karnataka High Court in the case of Richter
Holding v. The Assistant Director of Income Tax1 used this doctrine to take the
view that it may be necessary for the fact finding authority to lift the corporate
veil to look into the real nature of the transaction and ascertain the virtual facts.
The Hon’ble High Court further held that the Assessee, as a majority share
holder, enjoys the power by way of interest and capital gains in the assets of the
company and it is necessary to identify whether the transfer of shares includes
indirect transfer of assets and interest in the company. In view of the
aforementioned rulings, it is eminently clear that the Indian Courts are actively
pursuing this doctrine to ascertain the actual offenders and the nature of
transactions behind the veil of the company. In Juggilal Kamlapat v.
Commissioner of Income Tax, Uttar Pradesh2 1 Writ Petition No. 7716/2011
decided on 24.03.2011 2 AIR 1969 SC 932 (SC Full Bench), the Hon’ble
Supreme Court had taken the view that the doctrine of lifting the corporate veil
ought to be applied only in exceptional circumstances and not as a routine
matter. However, if the intention of the Assessee is to avoid tax through a
collusive device, and the real purpose was something else than what appeared
on the face, then the Court may lift the veil of corporate entity to pay due regard
to the economic realities behind the legal facade. The above analysis shows that
in the initial years the Courts have taken a balanced approach while using the
doctrine and have time and again stated that the doctrine must be used in
exceptional cases and must not be used as a tool to fasten liability on the
entities behind the corporate curtain. With every passing year we see that this
doctrine is being used more extensively than the previous years. This comes
especially in the light of the fact that India is witnessing a corporate transition
and issues pertaining to tax evasion, liquidation and subsidiary conglomerates
are surfacing at an ever increasing rate. The key question that needs to be
understood is to what extent should this doctrine be used; should it be used only
in exceptional circumstances as it has put forth by the founding legal luminaries
or should it be given a dynamic and versatile approach and be used as
extensively as possible.