CORPORATE VEIL

&

GOVERNANCE

PARDE MEIN REHNE DO PARDA NA UTHAO

In law the subject of the lifting of corporate law has another interesting angle. The need
to juxtapose the creation of a legal person vis a vis the corollary of the legal fiction
behind creation of the legal person. This (These) provision/s in company related
legislation is to enable challenge such legal person/legal fiction Juristically.

Statutory incorporation of a company as an entity distinct from its members is virtually

the conferment of legal personality on an association which has no legal life. This legal
fiction, having its genesis in statute, must, of course, be allowed to operate. However, in
some circumstances, the fiction may have to be disregarded or, if one may put it that
way, it has to be offset and counteracted in the interests of justice. What the court, in
effect, does when it lifts the corporate veil is to lay naked the legal persons. The court,
performing its role of statutory construction, limits the statutory fiction to certain
circumstances and excludes other circumstances from its scope. In other words, the
court construes in a limited manner the statutory language creating the fiction of
incorporation.

One of the most interesting, but, at the same time, most difficult, questions in company
law relates to the doctrine of lifting the corporate veil. This is one of those doctrines
which is easily understood in its broad outline, but is not so easily applied when a
concrete case presents itself.

The reasons for this situation are many. In the first place, by partially disregarding the
corporate personality of an entity, the court, in fact, takes a step which is not in literal
conformity with the theory of incorporation, given effect to by a statutory provision.
Obviously, the court here assumes a jurisdiction which has to be exercised with caution.
Secondly, the circumstances in which the veil of a corporation may be lifted and an act,
nominally done by the corporation, may, by judicial construction, be attributed to some
other person or entity, are indefinite and theoretically infinite. That must be so, because
the power is asserted and exercised on grounds which are outside the statute law
relating to companies and are based on principles which are uncodified. Those
circumstances have no other definition, excepting that they are linked by one common
thread of protecting the public interest. Thirdly, because of the elusive and uncodified
character of those circumstances, differences of opinion are bound to arise between the
trial judge and the appellate court, so that legal advisers of corporations can never
predict with certainty what view the court will take about a particular transaction, when it
is argued that someone other than the company should be held liable. In a sense, the
jurisdiction to lift the corporate veil which the courts have commenced exercising is
analogous to the jurisdiction which the courts in equity started exercising, in order to
remove or reduce injustice or hardship in specific situations that arose from strict
application of common law rules. The master principle was justice and equity, but the
situations amenable to that principle could never be codified.

This very elusive quality of the doctrine of lifting the veil has encouraged academic
thinking and discussion on the subject It is common experience that where the sources
of legal doctrine in a particular sphere are not the bare bones of a statute, but the
flexible tissues of case law, academicians feel tempted to offer not only an analysis of
what has gone into the law by past rulings, but also an anticipation of what is likely to
enter the field of law by future judicial pronouncements.

This is not a process peculiar to the sphere of company law. Statutory interpretation of
rules themselves throw up problems which can be attributed to a particular statutory
fiction. Two general principles, apparently in conflict with each other, seem to be
operative. These are:

A: In interpreting a statutory provision creating a legal fiction, once the purpose of the
fiction is ascertained, the court must give it its logical scope. After ascertaining the
purpose, full effect must be given to the statutory fiction and it should be carried to its
logical conclusion - State of Bombay v. Pandurang Vinayak AIR 1953 SC 244. To that
end, it will be proper and even necessary to assume all those facts on which alone the
fiction can operate - CIT v. Sardar Teja Singh ATR 1959 SC 352.

In a passage which is very often quoted, Lord Asquith stated : "If you are bidden to
treat an imaginary state of affairs as real, you must surely, unless prohibited from doing
so, also imagine as real the consequences and incidents which, if the putative state of
affairs had in fact existed, must inevitably flowed from or accompanied it. The statute
says that you must imagine a certain state of affairs ; it does not say that having done
so, you must cause or permit your imagination to boggle when it comes to the inevitable
corollaries of the state of affairs." - East & Dwelling Co. Ltd. v. Finsbury Borough
Council [1951]2 All ER 587 (HL).

To quote a proposition laid down in the context of sections 42 and 43 of the Indian
Income-tax Act, 1922 (deeming the agents of non-residents to be the assessees), "now,
when a person is deemed to be something, the only meaning possible is that whereas
he is not in reality that something, the Act of Parliament requires him to be treated, as if
he were" (p.56) - CIT v. Bombay Corpn. AIR 1930 PC 54.
B: But there is a counter principle, which tells us that a fiction should not be extended
beyond the purpose for which it is created. The court is entitled to ascertain for what
purposes and between what persons the statutory fiction is to be resorted to. It is by
virtue of this counter principle; it seems that courts exercise jurisdiction to lift the
corporate veil.