COMPANY LAW

UNIT 1.4

CORPORATE VEIL THEORY

By

Dr. A.J. RaJu

(Professor and HoD)

Department of Commerce

Rajarshi Shahu Mahavidyalaya(Autonomus)

Latur(Maharashtra)
 COMPANY LAW
UNIT 1.4
CORPORATE VEIL THEORY
The concept of corporate Veil
Corporate Veil refers to a legal concept whereby the company is identified separately from its
members.

➢ According to this concept, the members of company are shielded (protected) from the liability
arising from company’s actions.

➢ If the company incurs any debts or contravenes any laws, the members should not be held liable for
those actions or errors.

➢ It means only the company is responsible for its actions and not its members. Thus, the shareholders
are protected from the acts of the company.

➢ The foundation of the concept of Corporate Veil is laid down through judicial interpretations.
 COMPANY LAW
UNIT 1.4
CORPORATE VEIL THEORY
In Salomon Vs Salomon and Co Ltd, the House of Lords, laid down that a company is a person distinct and
separate from its members. In this case,, one Salomon incorporated a company named “Salomon& Co
Ltd” with seven members consisting of himself, his wife, four sons and his daughter. The company took
over the personal business assets of Salomon for Rs.38,782 and in turn, Salomon took 20,000 shares of
Re.1each, debentures worth Rs.10,000/-of the company with charge on the company’s assets and the
balance in cash. His wife, daughter and four sons took up one share of Re. 1/- each. Subsequently the
company went into liquidation due to general trade depression.
The unsecured creditors to the tune of Rs.7000/- contended that Salomon could not be treated as a
secured creditor in respect of shares held by him, as he was the Managing Director of the one man
company which was not different from Salomon and the cover of the company was a mere sham and
fraud.
It was held by the Court that, the company is different from that of its members and even if the same
persons manage the company and carries out the precisely same business as it was before
incorporation. Hence, the subscribers, as members, not liable for the acts of the company, except to the
extent and in the manner provided in the Act.
 COMPANY LAW
UNIT 1.4
CORPORATE VEIL THEORY
Lifting of Corporate Veil;
➢ The advantage of incorporation can be enjoyed by only those who honestly use the veil of company
for the collective benefit of the company,
➢ Where there is a dishonest and fraudulent intention to utilise the facility of incorporation, the law can
remove the corporate veil and identity of the persons who are behind and responsible for
commission or preparation of fraud and hold such persons as personally liable. This concept is
called lifting of corporate veil.
The Corporate Veil is lifted in the following cases;
1.Protection of Revenue/taxes: Where the corporate entity is used to evade tax, the perpetrators shall
be identified and punished.( Reference-Juggilal Vs Commissioner of Income Tax
2.Determining enemy character of company: If the affairs of the company are under the control of
people of enemy county, then it is treats as an enemy company. In such a situation the court may
examine the character of the persons who are at the helm of affairs of the company.(Reference-
Dailmer Co Ltd.Vs Continental Tyre and Rubber Co Ltd.)
 COMPANY LAW
UNIT 1.4
CORPORATE VEIL THEORY
Lifting of Corporate Veil;
3.Protection of Public Policy: Courts shall lift the corporate veil, in order to protect public policy and
prevent transactions contrary to public policy. ( Reference-Connors Vs Connors Ltd)
4.Prevention of fraud: Where a company is used for committing fraud, say defrauding creditors or
circumventing law, the corporate veil shall be lifted.(Reference-Gilford Motor Co Vs Horne)
5.Formation of Subsidiaries merely to act as Agents: When a company floats another company merely
to act as its own agent, then the principal company will be liable for the acts of the
company.(Reference-Merchandise Transport limited Vs British Transport Commission)
6.Determining Technical Competence: the technical competency of the promotors of the company can
be considered to be that of the company’s by lifting the corporate veil(Reference-New Horizons Ltd Vs
Union of India)