Corporate Veil

A company in the eyes of law is regarded as an entity separate and distinct from its members.
Any of its members can enter into contracts with the company in the same manner as with any
other individual.

Further, a shareholder or member of a company cannot be held liable for the acts of the
company even if he holds the entire share capital. The company's money and property belong
to the company, and not to the shareholders.

There is a Veil between shareholders/ members and company.

CASE: Salomon Vs. Salomon and Co. Ltd

The verdict in the case of Salomon es. Salomon and Co. Ltd. is an important illustration of the
separate legal entity of a company. Salomon was a trader in shoes who formed a company
named Salomon and Co. of which he, his wife, daughter and four sons were the members. He
sold his business to the company for £30,000 in consideration of which the company allotted
him £20,000 worth of shares and £10,000 worth of debentures. The company was later wound
up because of excessive financial loss. At the time of winding up, the assets of the company
amounted to £6,000, whereas its liabilities included £10,000 of debentures and £7,000 of
unsecured creditors. The creditors put up the claim that since Salomon and Salomon and Co.,
were the same entity unsecured creditors should get priority over the debenture-holder (who
was Salomon himself). It was held than Salomon and Salomon & Co were two separate entities
and the debenture-holder should have the priority in payment.

The verdict testifies to the fact that there is a corporate veil between a company and its
members when it is incorporated, which lawfully gives a separate.

Lifting the Corporate Veil

This principle of differentiating the legal entity of the company from that of its shareholders may
be referred to as 'Corporate veil'.

If the legal entity of a corporate body is misused for fraudulent purposes, the individuals
concerned will not be allowed to take shelter behind the corporate entity of the company.

However, under certain exceptional circumstances the courts may lift or pierce the corporate
veil of a company. Lifting or Piercing the corporate Veil means to hold persons controlling the
affairs of the company liable for the acts of the company.

Exceptions of Lifting the Corporate Veil

The circumstances under which the courts may lift the corporate veil may be discussed under
the following two heads:

1. Common Law Exceptions or (Judicial interpretations): The corporate veil has been lifted or
pierced by the courts.

II. Statutory Provisions/Exceptions

Common Law Exceptions

1. Determination of Enemy Character of a Company

• The Tribunal/Court lifts the corporate veil to determine the enemy character of a company and
examine the real promoters of the company.

• If the company's management constitutes hostile, aliens, or residents operating under the
direction of hostile aliens, the Tribunal can lift the corporate veil and have a look at the
company's real face.

CASE: Daimler Co. Ltd. VS. Continental Tyre and Rubber Co. Ltd.

• Daimler Co. Ltd was incorporated in England for the purpose of selling the motor tyres
manufactured in Germany by a German company. The German company held the bulk of the
shares in Daimler Co. Ltd and all the directors were German’s resident in Germany. During the
First World War, Daimler Co. Ltd company commenced an action to recover a trade debt. The
House of Lords held that the Daimler Co. Ltd was an enemy company for the purposes of
trading because its effective control was in enemy hands. Accordingly, the company was
debarred from maintaining the action. It would be against public policy to allow alien enemies to
trade.

2. Where company is a sham

• The court will lift the veil where the company is a mere cloak or sham i.e. where the device of
incorporation is used for some illegal or improper purpose.

CASE: Gilford Motor Co. Ltd. VS. Horne (1933)

Horne entered into an agreement with his employer company that after the termination of the
employment he would not solicit his employer's customers for a certain period of time. Soon
after the termination of his employment he formed a company of which the two shareholders
were his wife and one another person. The company sent out circulars to customers of his
former employer. An injunction was granted against Horne and against the company he has
formed restraining them from soliciting the plaintiff's pal customers. The court held the company
was a mere cloak for the Horne to commit a breach of his agreement against solicitation

3.Prevention of Fraud and Improper Conduct

• If a company conducts its affairs in a fraudulent and improper manner, the Tribunal is
empowered to ignore the separate entity of the company, and may treat the company and its
members as one entity.

CASE: Jones VS. Lipman

• Lipman had contracted to sell his land to Jones, but later changed his mind. To evade the
contract, he formed a company and sold his land to it. The court held the seller of land and the
company were one and the same entity, and made him sell his land to Jones with whom he had
made the commitment in the first place.

4. Where the company is acting as the agent of the shareholders

•Where a company is acting as an agent of its shareholders or of another company, it

will be liable for its acts.

CASE: Re F.G. Films Ltd. (1953)

• A British company was formed with a capital of 100 shares, out of which 90 shares were held
by an American the director of United States Film Company, and 10 shares were held by
another director, a British subject. The company produced a film called 'monsoon' the
production of which was financed by the company. The court refused to agree that the film was
made by the British company, the company was merely the nominee or agent of United States
Film Company.

5. Protection of revenue

 It is related that the company was formed for the purpose of evading the payment
of taxes, the court can pierce the corporate veil, and make the members liable for
the responsibilities of the company.

Case: Sir Dinshaw Mancekjee Petit

 D was a wealthy man getting huge dividend and interest income. In order to
avoid super tax, he formed four private companies and transferred his investment
in part to each of the four companies in exchange of their shares. Dividend
received Were credited in the account of the company and the amount was
 handed back to him as a loan. Thus, he divided his income in four parts to avoid
the tax liability. The court held that the companies did no business, the four
company was purely formed as a mean to avoid tax.

6. Avoidance of welfare legislations

 Avoidance of welfare legislation is as common as the avoidance of taxation.

Where the sole purpose of the new company was to use it as a device to reduce
the amount to be paid by way of bonus, the Supreme court upheld the piercing of
the veil to look at real transaction.

Case: Workmen of association Rubber Industry V/s Associated Rubber Co.

 A subsidiary was formed to split the profits of the company so that the incidence
of bonus in the hands of the parent company will be reduced. The Supreme court
discharged the existence of a separate company for the purpose of working out
bonus for its employees.