PROJECT ON

ON

THE CONCEPT OF EVOLUTION OF DOCTRINE OF LIFTING OF CORPORATE

VEIL WITH SPECIAL MENTION OF SHAREHOLDER’S CAPACITY TO LIFT
CORPORATE VEIL

Submitted to

Mr.Mukil

(Department of Corporate veil)

Submitted by

P.Prashanna Guruparan

III year BA0150032

 ACKNOWNLEDGMENT

At the outset, I take this opportunity to thank my Professor Mr. Mukil

from the bottom of my heart who has been of immense help during moments of
anxiety and torpidity while the project was taking its crucial shape.

Secondly, I convey my deepest regards to the Vice Chancellor Kamala

Shankar and the administrative staff of TNNLS who held the project in high
esteem by providing reliable information in the form of library infrastructure
and database connections in times of need.

Thirdly, the contribution made by my parents and friends by foregoing

their precious time is unforgettable and highly solicited. Their valuable advice
and timely supervision paved the way for the successful completion of this
project.

Finally, I thank the Almighty who gave me the courage and stamina to
confront all hurdles during the making of this project. Words aren’t sufficient
to acknowledge the tremendous contributions of various people involved in this
project, as I know ‘Words are Poor Comforters’. I once again wholeheartedly
and earnestly thank all the people who were involved directly or indirectly
during this project making which helped me to come out with flying colours.
 DECLARATION

I, P.PRASHANNA GURUPARAN do hereby declare that the project on

“The Concept of evolution of Doctrine of Lifting of Corporate veil with

special mention of shareholder’s capacity to lift corporate veil ” submitted

to Tamil Nadu National law school in partial fulfillment of requirement of

award of degree in undergraduate in law is a record of original work done by

me under the supervision and guidance of Professor Mrs. Deepa Manickam,

department of Administrative Law, Tamil Nadu National law school and has not

formed basis for award of any degree or diploma or fellowship or any other title

to any other candidate of any university

P.Prashanna Guruparan

B.A., LL.B (Hons)

 THE CONCEPT OF EVOLUTION OF DOCTRINE OF
LIFTING OF CORPORATE VEIL WITH SPECIAL MENTION
OF SHAREHOLDER’S CAPACITY TO LIFT CORPORATE
VEIL

INTRODUCTION

The most fundamental Principle of a company law is its corporate personality. It is on

this quintessential and elemental principle that which makes a company an entity which is

entirely distinct from its shareholders, promoters, directors etc:-1 Thus, when a company is

incorporated, a legal entity gets created, which is separate from its members, employees,

shareholders, directors, promoters etc., which has led to the concept of ‘corporate veil2’. The

purpose of establishing this doctrine was to provide business efficacy and convenience. The

main stimulation behind the formation of a corporation or a company is the limited liability

which is offered to its shareholders and because of this limited liability, the liability of each

shareholder is limited only what he or she has contributed as shares to the company3.

In the doctrine of ‘Lifting the Corporate Veil’, the law goes behind the mask or veil of

incorporation to determine the real person or group of people behind the company. The

concept of ‘lifting the corporate veil’ has been regarded by the courts and jurists. The Courts

according to Gower’s common dictum would lift the veil when the corporate personality of

the company is being blatantly being used as a means to commit fraud, improper conduct or

where the protection of public interest is of paramount importance or where the sole purpose

of forming the company was to evade taxes4. The corporation shall be regarded as an

1
Company Law, By Brenda Hannigan, Oxford Publications, Southampton, 2006
2
http://dspace.jgu.edu.in:8080/jspui/bitstream/10739/45/1/Harshit%20Saxena%20%20Lifting%20the%20Corpor
at e%20Veil.pdf
3
Stephen M. Bainbridge, ABOLISHING VEIL PIERCING, Harvard Law School, 2002.
4
V.S.Datey, Company Law Ready Reckoner, 3rd edition Taxmann’s
association of persons rather than a legal entity when the very same legal entity is used to

defeat public convenience, justify wrong or to defend crime.

To have clarity in the concept of ‘lifting of corporate veil’, corporate personality of a

company is required to be understood. The courts before did not affix any criminal liability of

the corporates on the ground that being an artificial personality, they are completely

incapable of having any mens rea but later the courts took an altogether different approach

wherein through judicial pronouncements they held that the corporates can be criminally

prosecuted5.

SEPARATE LEGAL PERSONALITY OF A COMPANY

The consequence of attributing a legal personality to a corporation is that it is distinct

entity from its members and this “legal personality” is often described as an artificial person

in contrast with a human being, a natural person6. This clearly indicates that a corporation is

completely capable of enjoying rights and of being subject to certain duties which are not

same as borne by its members.

The principle of separate legal entity of the company was judicially recognized by the

House of Lords in 1867 in the case of Oakes v. Turquand and Hording (1867). It was then

held that since an incorporated company has a legal personality distinct from that of its

members, a creditor of such a company has remedy only against the company and not against

an individual shareholder7.

The Principle of corporation having a separate legal entity was then established in an

Indian Case In Re Kondoli Tea estate case (1886) which had mentions in the 1956 companies

5
Angelo Capuano, THE REALIST’S GUIDE TO PIERCING THE CORPORATE VEIL: LESSONS FROM
HONG KONG AND SINGAPORE, Australian Law Journal, 2009.
6
Gower and Davies, Principles of Modern Company Law, 8th ed. Sweet and Maxwell, London, 2008
7
G.K.Kapoor, Company Law and Practise
Act. However this principle was firmly established in the landmark cases of Solomon v.

Solomon & Co. Ltd8 (1897) and is considered to be a popular case. In this case, Solomon,

who was a sole trader had a flourishing business as a leather merchant, had sold his

manufacturing business to Solomon & Co. Ltd., a company which he himself had

incorporated) in consideration for all but six shares in the company. He received debentures

worth 10 thousand pounds.

The other subscribers to the memorandum were his wife and five children who each

took up one share. The business subsequently collapsed and Solomon made a claim on the

basis of the debentures held as a secured creditor. The liquidator on the other hand argued

that Solomon could not rank ahead of other creditors on the ground that both the company

and Mr.Solomon were one and the same, in other words that the company carried on business

on behalf of Solomon.

The House of Lords on appeal subsequently held that Solomon & Co. Ltd. was not a

sham; that the debts of the corporation were not the debts of Mr. Solomon because they were

two separate legal entities; and that once the artificial person has been created, "it must be

treated like any other independent person with its rights and liabilities appropriate to itself."

Since, most of the provisions of Indian Law were borrowed from the English Law; it

mostly resembles the English Law. Solomon’s case has been the authority ever since in the

decisions of the doctrine in Indian company cases.

In the case of Macaura v. Northern Assurance Co. Ltd9, the House of Lords held that

the 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
8
Solomon v. Solomon & Co. Ltd (1897) A.C. 22
9
Macaura v. Northern Assurance Co. Ltd, (1925) A.C. 619
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.

The Privy Council in a more recent case of Lee v. Lee’s Air Farming10, the doctrine of

separate legal entity of a corporation was further supported wherein it held that Lee, could be

an employee of the company as a separate and distinct entity from the company which he

controlled, so that Lee’s wife could claim workers’ compensation following her husband’s

death.

Similarly, the Supreme Court in the case of Tata Engineering Locomotive Co. Ltd v.

State of Bihar & Others11, stated that a corporation in law is equivalent to a natural person

having a legal entity of its own which is completely separate from its shareholders. The

corporation has its own name and seal, separate assets from its members. The liability of its

members extend to only the share capital invested by them, similarly, the creditors of the

members would also not have no authority over the assets of the corporation.

EXCEPTIONS TO THE PRINCIPLE OF SEPARATE ENTITY

Lord Halsbury recognized the separate entity provided there was "no fraud and no

agency and if the company was a real one and not a fiction or myth12."

The reason why exceptions exist can be classified into two categories. Firstly, even

though a legal personality is attributed to the corporation, it cannot really be treated as natural

person as it incapable of committing a crime which requires the existence of mens rea unless

the Courts determine the intention of the directors or the members13. Secondly, strict

10
Lee v. Lee’s Air Farming (1961) A.C. 12
11
Tata Engineering Locomotive Co. Ltd v. State of Bihar & Ors. AIR 1965 SC 40
12
Supra note 2
13
Supra note 2
recognition of the principle may lead to an unjust or misleading outcome if interested parties

can "hide" behind the shield of limited liability14.

The judicial discretion and legislative action also allows the separate entity principle

to be disregarded where some injustice is intended, or would result, to a party (either internal

or external to the company) with whom the company is dealing15.

PIERCING OF CORPORATE VEIL

Lifting the corporate veil, in simple words means disregarding the corporate

personality and looking behind the real person who are in the control of the company and

where a fraudulent and dishonest use is made of the legal entity, the individuals concerned

will not be allowed to take shelter behind the corporate personality16. In this regards the court

will break through the corporate veil. According to the definition of Black Law Dictionary,

“piercing the corporate veil is the judicial act of imposing liability on otherwise immune

corporate officers, Directors and shareholders for the corporation's wrongful acts”17. In the

words of Aristotle, when one talks of lifting status of an entity corporate veil, one has in mind

of a process whereby the corporate is disregarded and the incorporation conferred by statute

is overridden other than the corporate entity an act of the entity.

Corporate personality of a company should ordinarily be respected. The whole law of

corporations is still based on this basic principle of corporate entity. There are umpteen

instances in which the courts have upheld this principle and resisted the temptation to break

through the veil18. But when the benefit is misused, the court is not powerless and it can lift

the veil of corporate personality to see the realities behind the veil. In doing so, the court sub

14
Supra note 2
15
Supra note 2
16
http://www.legalservicesindia.com/article/article/lifting-of-corporate-veil-indian-scenario-18761.html
17
Black’s Law Dictionary 1168 (7th ed. 1999)
18
V.S.Datey, Company Law Ready Reckoner, 3rd edition Taxmann’s
serves the important public interest, namely, to arrest misuse or abuse of benefit conferred by

law.

Thus, it is quite evident that ‘Piercing the veil’ law exists as a check on the principle

that, in general, investor shareholders should not be held liable for the debts of their

corporation beyond the value of their investment.

THE EVOLUTION OF CONCEPT OF DOCTRINE OF LIFTING OF CORPORATE

VEIL.

The history of this doctrine can be roughly divided into three periods. The first period lasted

from 1897, when Salomon v. Salomon was decided19, to around the Second World War. This

period can be called the early experimentation period, during which English courts

experimented with different approaches to the doctrine20. The second period began after the

War and continued until 1978, the year when Woolfson v. Strathclyde Regional Council was

decided21. This period can be regarded as the heyday of the doctrine. Much of the vitality of

the doctrine during this period can be attributed to Lord Denning, who was an enthusiastic

advocate and practitioner of veil piercing and one of the most influential English jurists of the

second half of the twentieth century22 . Woolfson marked the beginning of the third period,

which has lasted to this day23.

I Phase: 1897 – II World War phase (early representation period)

 Lack of well-defined approach towards the doctrine of lifting of corporate veil.

19
[1897] A.C. 22 (H.L.) at 22 (Eng.
20
Gilford Motor Co. v. Horne, [1933] Ch. 935 (A.C.) at 956 (Eng.) (piercing the veil for attempting to evade a
legal obligation); In re Darby, Brougham, [1911] 1 K.B. 95 at 103 (Eng.) (piercing the veil because of
misrepresentation). 32
21
(1978) S.C.(H.L.) 90, 90 (appeal taken from Scot.).
22
Cf. Sealy & Worthington, supra note 3, at 53 (noting Lord Denning’s “positive enthusiasm” for veil piercing).
23
Thomas K. Cheng, THE CORPORATE VEIL DOCTRINE REVISITED: A COMPARATIVE STUDY OF
THE ENGLISH AND THE U.S. CORPORATE VEIL DOCTRINES, University of Hong Kong Faculty of Law
Research Paper ,21 Mar 2011
  Common law concepts such as agency, trusteeship were experimented to resolve

corporate law issues24.

 Even though there was no particular doctrinal approach the courts went on to pierce

the corporate veil.

 The cases where corporate veil was lifted successfully were Gilford Motor v. Horne25,

In re Darby, Brougham26, Trebanog Working Men’s Club and Institute, Ltd v.

MacDonald27, and Rainham Chemical Works, Ltd. v. Belvedere Fish Guano Co28.

II Phase: II World War-1970

 Notable veil piercing cases in this period included In re FG (Films)29, Jones v.

Lipman30, Firestone Tyre and Rubber v. Lewellin31, and Merchandise Transport v.

British Transport Commission32.

 In the case of Littlewoods Mail Order Stores v. Inland Revenue Commissioners Lord

Denning put forth the important holding

The doctrine laid down in Salomon v. Salomon & Co. [1897] A.C. 22, has to be

watched very carefully. It has often been supposed to cast a veil over the personality

of a limited company through which the courts cannot see. But that is not true. The

courts can and often do draw aside the veil. They can, and often do, pull off the mask.

They look to see what really lies behind. The legislature has shown the way with

group accounts and the rest. And the courts should follow suit

24
Jonathan R Marcey, FINDING ORDER IN THE MORASS: THE THREE REAL JUSTIFICATIONS FOR
PIERCING THE CORPORATE VEIL, Cornell Law review, 2014.
25
[1933] Ch. at 943
26
6 [1911] 1 K.B. at 100
27
[1940] 1 K.B. 576 at 582 (Eng.)
28
[1921] 2 A.C. 465 (H.L.)
29
[1953] 1 W.L.R. at 483.
30
[1962] 1 W.L.R. at 832
31
[1957] 1 W.L.R. 464 (H.L.) at 46
32
[1962] 2 Q.B. at 173
III Phase:-1970 –till present times

 In the recent times the corporate veil lifting doctrine has took new dimensions.

 Corporate veil is lifted in certain special cases as in Becket Investment Management

Group v Hall Court of Appeal pierced the veil between the parent company and its

subsidiaries to give effect to a covenant not to compete in an employment contract33.

Lifting of Corporate Veil in Indian Scenario:

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.

The Supreme Court in Tata Engineering Locomotive Co. Ltd. v. State of Bihar

and others, “the corporation in law is equal to 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 LIC of India v. Escorts Ltd, 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,

the Supreme Court lifted the veil and held that Hindal co, the holding company and its

subsidiary, Renusagar must be treated as the own source of generation of Hindalco and on

33
Anil Hargovan and Jason Harris PIERCING THE CORPORATE VEIL IN CANADA: A COMPARATIVE
ANALYSIS, University of New South Wales
that basis, Hindalco would be liable to pay the electric duty.

After the decision of Renusager case, the doctrine has been considered in several cases.

Circumstances where corporate veil can be lifted:

Courts and Legislatures throughout the globe have attempted to narrow down scope and

applicability of the doctrine under following two heads

 STATUTORY PROVISIONS

 JUDICIAL PRONOUNCEMENTS

STATUTORY PROVISIONS

The Companies Act, 1956

1) Reduction of Membership: Section 45

2) Holding and Subsidiary Company: Section 212

3) Failure to Deliver Share Certificate (Section 113)

The Companies Act- 2013

1) Failure to return application money (Section-39)

2) Misrepresentation in prospectus (Section- 34 and 35)

3) Fraudulent Conduct (Section 339):

4) Investigation into affairs of Company:- (Sec.- 208)

JUDICIAL PROVISIONS:

1. Tax Evasion

2. Prevention of fraud/ improper conduct

3. Determination of enemy character

4. Liability for ultra-vires acts

5. Public Interest/Public Policy

6. Agency companies

7. Negligent activities

8. Sham Companies

9. Companies intentionally avoiding legal obligations

SHAREHOLDER’S CAPACITY TO LIFT THE CORPORATE VEIL:

In general the shareholder can’t lift the corporate veil himself since they have no judicial

authority to lift the corporate veil. Only courts have the authority to pierce the corporate veil.

The shareholder can ask the court to lift the corporate veil.

Absence of Statutory Provisions:

 Not in statutes there is a mention that shareholder can himself lift the corporate veil

unlike in the case of SEBI.

 The criteria for determining a “fit and proper” person are set out in

Schedule II of the SEBI (Intermediaries) Regulations, 2008 (“Intermediaries

Regulations”), which permit SEBI to review whether the applicant, its principal

officer and key management persons possess the requisite integrity, reputation and
 character, whether they have convictions or restraint orders against them and their

competence (including financial solvency and net worth).

Absence of Judicial Pronouncements:

 There are no holdings in cases which neither empower nor restrict the shareholders to

lift the corporate veil themselves.

 But the Court has restricted the Arbitral Tribunal to pierce the corporate veil as held

in the case of Sudhir Gopi vs. IGNOU there was no express or implied consent from

Mr.Gopi to be party to the arbitration agreement.

SHAREHOLDER DEMANDING THE COURT TO LIFT THE CORPORATE VEIL:

But the shareholder can ask the court to lift the corporate veil in certain circumstances. The

following cases are where shareholders demanded the court to lift the corporate veil.

To claim losses:

Smith, Stone & Knight Ltd. v. Birmingham, [1939] 4 All E.R. 116 (K.B.):- In this case

the shareholders of the company Smith, Stone Knight company demanded the court to lift the

corporate veil to claim compensation from the government.

Facts:

In the case of Smith, Stone & Knight v. Birmingham Corporation, there are two

issues need to be considered by the court which is whether Birmingham Waste Co Ltd

(BWC) was an agent for Smith, Stone & Knight Ltd (SSK) and whether it was entitled to
compensation from the local government. In this case, Birmingham Waste occupied the

premises which owned by Smith, Stone & Knight to operate the waste paper business.

Besides, Birmingham Waste was a subsidiary of Smith. Birmingham Corporation wanted to

acquire the premises owned by Smith.

However, Birmingham Corporation argued that these two companies were two

separate entities and refused to compensate Smith. In this circumstance, the court found out

Smith, Stone & Knight Ltd, a holding company did not transfer ownership of waste paper

business and land to Birmingham Corporation.

Therefore, the waste paper business was still the business of parent company and it

was operated by the subsidiary as agent of the parent company. (Cyanlts, 2009) Thus, when

the justice is so demands, the veil is lifted by the court as Birmingham Waste was the mere

agent of the holding company. The subsidiary was maintained by Smith, Stone & Knight. In

this circumstance, the agency relationship existed as such the owner of the land, Smith, Stone

& Knight was entitled to claim compensation for disturbance of business from Birmingham

Corporation.

In the case of Ampol Petroleum Pty Ltd v Findlay, the defendant argued that the

veil should be lifted by the court to show that the losses incurred by the company were his

loses so that he is entitled claim for compensation. Fullagar J held that

“If the defendant does embark on establishing loss of profits (or capital or

goodwill) at an enquiry as to damages, I consider on the present state of the evidence

that the “corporate veil" may be pierced for these purposes, that is to say, I consider

that the defendant will be entitled to include losses to his company or companies flowing
from the breach, provided he establishes (in addition to causation) that the loss to the

company was his loss." (Ian M Ramsay)

In addition, Fullagar J also held that the relevant companies and all assets included

their monies was wholly controlled by the defendant. Thus, when the justice of the case so

demands, the court lifted the veil of incorporation.

Invitation to invest with fraudulent intentions

Saurabh Exports v. Blaze Finance & Credits (P.) Ltd. Defendant no. 1 was a private

limited company. Defendant no. 2 and 3 were the directors of that company. Defendant no. 4

was the husband of D-3 and the brother of D-2. Allegedly on representation of D-4 that D-1

company was inviting short term deposits at good interest rates, plaintiff made a deposit of

Rs.15 lakhs in the company for a period of 6 months. When the company failed to pay the

amount, the plaintiff sued it for the said amount along with interest. D-2 and 3 denied their

liability in the ground that there was no personal liability of the directors as the deposit was

received in the name of the company. D-4 denied the liability on the ground that it had

nothing to do with the transaction in question as he was neither a director nor a shareholder of

the company so it was held that he had no locus in the company and hence not liable. It was

held that D-3 being a house wife had little role to play and therefore could not be made liable.

The plaintiff was sought to be defrauded under the cloak of a corporate entity of D-1 and,

therefore, corporate veil was lifted taking into consideration that D-1 was only a family

arrangement of the remaining defendants. D-2 was running the business in the name of the

company. So D-1 and D-2 were both personally liable.

Fraudulent Intentions:

Stone & Rolls v. Moore Stephens, the sole shareholder and director of a company had set up

a fraudulent scheme, which its external auditors failed to detect, and swindled huge sums of

money from some banks34.The company subsequently went into liquidation and the liquidator

brought claims against the auditors for professional negligence. At issue was whether the

culpable shareholder’s intentions should be attributed to the company, which would prevent it

from pursuing its claims against the auditors. The majority of the House of Lords set aside its

separate legal personality and imputed the shareholder’s fraudulent intentions to the

company. The company’s claims against the auditors were hence barred.

CONCLUSION:

Thus it is abundantly clear that incorporation does not cut off personal liability at all

times and in all circumstances. “Honest enterprise, by means of companies is allowed; but the

public are protected against kitting and humbuggery". The sanctity of a separate entity is

upheld only in so far as the entity is consonant with the underlying policies which give it life.

Thus those who enjoy the benefits of the machinery of incorporation have to assure a

capital structure adequate to the size of the enterprise. They must not withdraw the corporate

assets or mingle their own individual accounts with those of the corporation. The Courts have

at times seized upon these facts as evidence to justify the imposition of liability upon the

shareholders.

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

34
[2009] UKHL 39, [2009] 1 A.C. 1391
which the Law Courts would pierce the corporate veil. But these categories are just

guidelines and by no means far from being exhaustive.

BIBLIOGRAPHY:
Books referred:

1. G.K.Kapoor, Company Law and Practise, (19th Edition, June 2016) Taxmann’s

2. V.S.Datey, Company Law Ready Reckoner, 3rd edition Taxmann’s

3. Gower and Davies, General Principles of Modern Company, 9th edition Sweet and

Maxwell.

4. Brenda Hannigan, Company Law, By Oxford Publications, Southampton, 2006

5. Derek French, Stephen and Christopher Ryan ,Company Law, Oxford University

press

Articles Referred:

1. Jonathan R Marcey, FINDING ORDER IN THE MORASS: THE THREE REAL

JUSTIFICATIONS FOR PIERCING THE CORPORATE VEIL, Cornell Law

review, 2014.

2. Anil Hargovan and Jason Harris PIERCING THE CORPORATE VEIL IN

CANADA: A COMPARATIVE ANALYSIS, University of New South Wales.

3. Stephen M. Bainbridge, ABOLISHING VEIL PIERCING, Harvard Law School,

2002.

4. Angelo Capuano, THE REALIST’S GUIDE TO PIERCING THE CORPORATE

VEIL: LESSONS FROM HONG KONG AND SINGAPORE, Australian Law

Journal, 2009.

5. Peter B. Oh, VEIL-PIERCING, University of Pittsburgh School of Law, Feb 2010

6. Thomas K. Cheng, THE CORPORATE VEIL DOCTRINE REVISITED: A

COMPARATIVE STUDY OF THE ENGLISH AND THE U.S. CORPORATE

VEIL DOCTRINES, University of Hong Kong Faculty of Law Research Paper ,21

Mar 2011