DOCTRINE OF PIERCING THE

CORPORATE VEIL
INTRODUCTION
The theory of corporate entity is indeed the basic principle on which the whole law of corporation
stems from. Having a Separate Legal entity is one among the most important component of a company .
Incorporation of company by registration was introduced in 1844 and in 1897 subsequently in Salomon
vs Salomon, the House of Lords effected these enactments are cemented into English law the twin
concepts of the corporate entity and limited liability. In that case, the apex court laid down the principle
that a company is a distinct legal person entirely different from the members of the company. This
principle is referred to as the veil of Incorporation. Lifting of Corporate veil is one of the advantages of
having incorporation.

After the incorporation , a company becomes legal person separate and distinct from its members. It has
a corporate personality of its own with rights, duties and liabilities separate from those of its individual
members. Thus a veil of incorporation exists between the company and its members and due to this
company isn’t identified with its members. In order to protect themselves from liabilities of the
company, its members often take shelter of the corporate veil. Inorder to protect themselves from
liabilities of the company. Sometimes this corporate veil is used as a vehicle of fraud or evasion of tax
and statutory provisions.

OBJECTIVE OF THE STUDY

1. To deal with the exercise of wide discretion by the courts in lifting of the corporate veil
2. To substantiate the case study

SCOPE OF THE STUDY

The corporate veil is initiated by the government to help the company and its members to defend from
various problems. It has been found that this study is directed to analyses the problems and drawbacks
on the corporate veil. I determine the actual drawbacks existing on the selected cases in this study may
facilitate the legal entities, various corporate and shareholders. This study will largely rely on the
discretion that’s been exercised by the courts in the lifting the corporate veil to impose liability on the
members of the company.

RESEARCH METHODOLOGY
1. The study that this article relies is a Descriptive study.
2. Descriptive study is used to describe characteristics of a population or phenomenon being
studied. It does not answer the question about “how, when and why the characteristics
 occurred”. Thus descriptive research cannot be in a relationship, where one variables affects
another.
3. As a Descriptive study, I have taken some cases on this topic as well.

“ THE VEIL OF CORPORATE PERSONALITY EVEN THOUGH NOT LIFTED SOMETIMES , IS BECOMING
MORE AND MORE TRANSPARENT IN MODERN COMPANY JURISPRUDENCE”

REVIEWS ON CORPORATE VEIL

1. C.A. Sandeepkani : Lifitng of Corporate veil, 21/5/2007 on the Article Tax Guru

In cases where its established that an individual or other entities have used a corporate form for a
wrongful purpose; to perpetuate a fraud; circumstance a statute or some other misdeeds; the court
may decide to ignore the corporate personality and hold the directors, shareholders /officers
responsible for the obligations of the corporate entity, however, as stated earlier, in the facts of the
present case, there is no grand to disregard the corporate form, in view of the above, the petition
was allowed and the impugned award to the extent that the petitioner is held liable for the awarded
amounts, is set aside. The parties are left to bear their own costs. This is one among the erroneous
decision of the courts which imports lots of uncertainity over the statute.

2. Vasundhara Majithia, Yamini Rojora: Lifting of Corporate veil; April 8 2015, on the Articles
Academike – Articles on Legal Issues.

The fundamental attribute of corporate personality , from which all other consequences flow if
that the corporation is a legal entity distinct from its members. This doctrine has been
established for business efficacy, necessity and convenience. In the doctrine of Lifting the
Corporate veil, the law goes behind the mask of a company. It is one of the most widely used
doctrines to decide when a shareholder or shareholders will be held liable for obligations of the
corporation and continues to be the most litigated and most discussed doctrines in all of the
corporate law. Therefore, a study of the same through the lens of leading case laws and
judgments as done by the author would be highly beneficial.

LIFTING OF THE CORPORATE VEIL

1. Judicial interpretation
2. Statutory Interpretation

LEGAL STANDARDS FOR PIERCING THE CORPORATE VEIL:

UNDER STATUTORY PROVISIONS

1. Non- compliance of requirements of Incorporation ( section 464 ) : The purpose of the
provision is to withdraw the advantages of incorporation when the conditions of incorporation
aren’t maintained.
 2. Misrepresentation in the Prospectus (sections 34,35) : In case of any of misrepresentation in
the prosepectus, every director , promoter and every other person who authorizes such issue of
prospectus incurs liability towards those who subscribed for shares on the faith of untrue
statement ( section 34)

3. Failure to return Application money: if the company fails to receive minimum subscription
within 120 days after the date of issue of the prospectus , it must refund the entire application
money within next 10 days 9 (section 39). In case of any default, the company and its officer
who is in default shall be liable to a penalty, for each default, of one thousand rupees for each
day during which such default continues or one lakh rupees , whichever is less.
4. Misdescription of Name : where the name of the company is not mentioned properly while
transacting any kind of business in the name of the company, the signatory directors are to be
held liable ( section 12).
5. Fraudulent conduct (section

6. Failure to return Application money: if the company fails to receive minimum subscription
within 120 days after the date of issue of the prospectus , it must refund the entire application
money within next 10 days 9 (section 39). In case of any default, the company and its officer
who is in default shall be liable to a penalty, for each default, of one thousand rupees for each
day during which such default continues or one lakh rupees , whichever is less.
7. Misdescription of Name : where the name of the company is not mentioned properly while
transacting any kind of business in the name of the company, the signatory directors are to be
held liable ( section 12).
8. Fraudulent conduct (section 339): While winding up of the company, if appears the intent was
to defraud , then the creditors liability shall be incurred if proved.
9. For Investigating the Actual Owner of the company : Under section 216 of the Act , the central
government may appoint one or more inspectors to investigate and report on the membership
of any company to determine the true persons of the company.
10. Liablility of Ultra vires act : Generally the object clause of the memorandum defines the
parameters within which the company functions. Any act which vanishes this object clause is
ultra vires for which the members or the directors will be held liable.

BY JUDICIAL INTERPRETATION
1. Protection of Revenue: In the case of Sir DinshawManeckjee Petit, Re (AIR 1927 Bom. 371),
the assesse was a millionaire earning huge income by way of dividend and interest. He informed
four private companies and transferred his investments to each of these companies in exchange
of their shares. The dividends an interest income received by the company was handed back to
Sir Dinshaw as a predented loan. It was held that the company was informed by the assesse
purely and simply as a means of avoiding tax and company was nothing more that assess
himself.
2. Fraud : In the case of Gilford motor company ltd v. Horne (1933) 1 CH 935, where 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 his wifes name and solicited the customers of the company. The court of
appeal was of the view that the “ company was formed as a device, a stratagem, in order to
mask the effective carrying which perpetrates fraud.
3. Determination of the enemy character of the company : In the case of the Dialmer Company
Ltd. V. Continental Tyre & Rubber Co (1916) 2 AC 307, a company was incorporated in London
by a German company for the purpose of selling tyres manufactured in German.. Its majority
shareholders were Germans. A war was declare between Germany and England and since the
majority shareholders were controlled by germans , enemy company, the trade debt was
dismissed on the ground that such payment would amount to trading with the enemy company.
4. Contempt of Court : In the case of Jyoti Ltd v. Kanwaljit Kaur Bhasin (1987 Del HC) , the court
here held that Corporate veil can be lifted to punish for contempt of court. Although such cases
of contempt proceedings are very few it cant be made as an exception to the general rule of
SEPARATE LEGAL ENTITY
5. Acting against Public policy : In the case of PNB Finance Ltd v. Shital Prasad Jain (1983 Del
HC) , the court extended this Doctrine to meet the ends of justice. Lifting of Corporate veil is
always in question due to its vagueness. Moreover, the ambit of Public policy is so wide that it
can cover too many things . An exception to the separate legal entity cannot go to an extent to
disregard the principle in its totality. Also the ambit of an exception should be kept as small as
possible , so that a clear line can between the principle and the exception.
6. When purpose is to avoid legislations : when the purpose of formation or existence of an entity
is to avoid legislation, then the courts can lift the corporate veil, as was held in the case of
Workmen employed in Associated Rubber Industry Ltd. V. Associated Rubber Industry Ltd. AIR
1986 SC 1. In this case the holding company had been receiving dividends on the share
investments in the subsidiary company. When the said income was added in companys income
while calculating the workers bonus under the Payment of Bonus Act-1965, the holding
company formed a new, wholly-owned subsidiary of its own and transferred the whole of its
dividend income to said newly formed subsidiary company. This latter company had no other
source except what it got by way of dividend from the holding company. Thus the profits
available to workers for calculation of income got reduced, that thereby decreased the amount
of individual bonuses. Justice Reddy while lifting the corporate veil said: “ A new company is
created , wholly owned by the principal company with no assets of its own except those
transferred by the principal company, with no business or income of its own except receiving
dividends from shares transferred it to by the principal company and serving no purpose
whatsoever except to reduce the gross profits of the principal company. These facts speak for
themselves”.
7. Contempt of court : In the case of Jyoti Ltd. V Kanwalijit Kaur Bhasin 1987 Del HC, the court
has held that the corporate veil can be lifted to punish for contempt. Although such cases of
contempt proceedings are very few and those that don’t squarely fall in this ambit, cannot be
made an exception to the general rule of “Separate legal entity”. Whereas in U.K.Mehra v.
 Union of India AIR 1994 Del 25, the court had specifically directed through an interim order to a
certain company not to enter into any joint venture in India and the company entered in India
through the wholly owned subsidiary, the court held that it could not be called as a contempt of
courts order and the subsidiary would not be called as a joint venture.

LEGAL ISSUES SURROUNDING IMPOSISTION OF CRIMINAL LIABLITY ON CORPORATES

Applying these principles mentioned above, courts in the past have pierced the corporate veil to tax
underlying assets of a company in cases of fraud , sham, tax avoidance, etc. The Vodafone International
Holdings v. Union of India ( S.L.P.(C) No.26529/2010) , presented a case of misuse of the corporate
structure to evade taxes. The apex court in this case observed that , “Once the transaction is shown to
be fraudulent , sham , circuitous or a device designed to defeat the interests of the shareholders ,
investors ,parties to the contract and also for tax evasion, the court can always lift the corporate veil
and examine the substance of transaction”. The court according held the IT Office to pierce the
corporate veil whether to know , where the income tax is been paid in India or Mauritius.

Similarly in Commissioner of Income Tax v. Sri Meenakshi Mills Ltd. AIR 1967 SC 819, The court held
that the veil can be lifted to look into the economic realities behind the legal façade.

In Life Insurance Corporation of India v. Escorts Limited and Others, (1986) 1 SCC 264, the court
pointed out four key instances when the veil can be pierced

1. Where the statute itself contemplates lifting the veil

2. Where there is a fraud or improper conduct intended to be prevailed’
3. Where the taxing statute or the beneficial statute is sought to be evaded
4. Where associated companies are inextricanly as to be, in reality part of one concern.

Another important case which came up recently is VTB Capital v. Nutritek (2012) EWCA Civ 808., in
which the dispute arose out of a fraudulently obtained loan. The court of Appeal, in this case made two
important observations. First it said- “LIFTING THE CORPORATE VEIL” doesn’t ignore the existence of the
company, but allows the court to provide a remedy that would otherwise be available only against the
company. Secondly , it said that there is no requirement that the corporate veil can be lifted only when
there is no other remedy available. These two key points, when applied to a criminal case of default of
companies , means that imposing criminal liability can very well be a remedy even when there are other
remedies available. This is significant development because, it allows piercing of corporate veil to
impose criminal liability even when the matter can be disposed by mere imposition of civil or
administrative liability.
CONCLUSION
After going through all the decisions on point, it can be seen that the courts have exercised very wide
discretion to decide whether or not to pierce the veil in particular case to impose liability upon the
members. The mere primary goals of corporate law is to mere certainity and predictability ,but these
decisions of court has lead to uncertainity and lack of predicatability regarding legal standards for lifting
the veil. The judges have choosen theories that springs to their mind to fasten the liability on equitable
grounds. The courts have at times seized upon certain facts as evidence to justify the imposition of
liability upon the shareholders. Therefore its observed that although courts have time again made
references to the different legal principles, they have often used them without much clarity and there
exists wide discretion with the courts whether to lift the corporate veil in a particular case or not, which
creates a mere perplexion towards rendering justice.