QUESTIONS

1. Members of a company, while in a general meeting, were killed by a bomb. The contention made by the
shareholders was the company has no one left to be run by, thus, should be wound up. Comment.

2. Mr. X, owner of a Timber Estate sold the whole of the timber to a timber company in consideration of fully
paid up shares in the company. Subsequently with several insurance companies he insured this timber against
fire - in his own name. Mr. X was the sole shareholder in the company and was also a creditor of the
company to a large extent. A great part of the timber was destroyed by fire - he sued the insurance companies
to recover the loss.

What would you do as the Judge in this case?

 ANSWERS

K/9 Meat Supplies (Guildford) Ltd., Re, 1966 (3) All E.R. 320
The court held that the company would still survive as it has perpetual
succession. The only way to end the existence of the company is by way of
winding up under the relevant provisions and not otherwise.

Macaura v Northern Assurance Co Ltd [1925] AC 619

• Members have no interest in a company’s property
• The owner of a timber estate sold all the timber to a company which
was owned almost solely by him. He was the company’s largest creditor.
He insured the timber against fire, but in his own name. After the timber
was destroyed by fire the insurance company refused the claim.
• The House of Lords held that in order to have an insurable interest in
property a person must have a legal or equitable interest in that property.
The claim failed as “the corporator even if he holds all the shares is not
the corporation… neither he nor any creditor of the company has any
property legal or equitable in the assets of the corporation.” (per Lord
Wrenbury, at pg 633).
 LIFTING OF THE CORPORATE VEIL

• “Corporation has no soul to be damned and no body to be kicked...”BUT

is “an entity separate from the individuals who form it or who come to
manage or work for it.” - ENTITY IN FICTION
• When a company is incorporated it is treated as a separate legal entity
distinct from its promoters, directors, members, and employees; and hence
the concept of the corporate veil, separating those parties from the
corporate body.

Is this true?
A corporation will be looked upon as a legal entity as a general rule but when
the notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud or defend crime the law will regard the corporation as an
association of persons.
 m on FACTS:
alo .C.
v s. S 97) A
m on . (18
lo td A Leather Merchant, trading in boots and shoes, decided to convert the business into a Ltd. Co. The
Sa o. L 22 company consisted only of the vendor, his wife, a daughter and four sons, who subscribed for one
C
&
share each. Total of 20,007 shares were issued. In part payment of the purchase-money, £10,000 of
debentures forming a floating charge were issued to the vendor and 20,001 shares were also issued
to the vendor. These shares gave the vendor the power of outvoting the six other shareholders. No
shares other than these 20,007 were ever issued.

All the requirements of the Companies Act 1862 were complied with. The vendor was appointed managing
director. Bad times came and the company was wound up. Receiver appointed – a creditor named Broderip sued
the company; he was repaid his £5,000. Broderip sought to challenge the validity of the initial transaction.

Floating charge is on all the assets of the company – fixed is on a particular property so the co. cannot sell that property but for
a floating charge the co. can continue functioning the way it is and as and when it will add/replace property the charge will be
on the new/replaced assets

ISSUE:

When the company failed, the company's liquidator contended that the floating charge should not be honored. The question
was whether the shareholder of a company could be imposed with the unlimited liabilities of the company and can be
personally charged for it?
WHAT HAPPENED NEXT?
 on& HELD:
om 2 2
. Sal .C.
s A
o n v 897) Salomon followed the required procedures to set the company; shares and debentures were issued. The
lom .( 1
Sa . Ltd House of Lords held that the company has been validly formed since the Act merely required 7
Co members holding at least one share each. There was no fraud as the company was a genuine creature of
the Companies Act as there was compliance and it was in line with the requirements of the Registrar of
Companies.

The Company is at law a separate person. Act created limited liability companies as legal persons separate and distinct from the
shareholders. They held that there was nothing in the Act about whether the subscribers (i.e. the shareholders) should be
independent of the majority shareholder. It was held that: “Either the limited company was a legal entity or it was not. If it were,
the business belonged to it and not to Mr. Salomon. If it was not, there was no person and nothing to be an agent [of] at all; and
it is impossible to say at the same time that there is a company and there is not." Hence the business belonged to the company
and not to Salomon, and Salomon was its agent.”

"The company is at law a different person altogether from the [shareholders] ...; and, though it may be that after incorporation
the business is precisely the same as it was before, and the same persons are managers, and the same hands received the profits,
the company is not in law the agent of the [shareholders] or trustee for them. Nor are the [shareholders], as members, liable in
any shape or form, except to the extent and in the manner provided for by the Act." Shareholders are shareholders for all
purposes with their respective rights and liabilities. The extent or degree of interest which each shareholder had or their
influence over the other shareholders is irrelevant.
 m on
S alo A.C.
v s. 97)
m on . (18
lo td
Sa o. L 22
C HELD:
&

Moreover, the shareholder need not be an independent and beneficially interested person. Once the company is
legally incorporated it must be treated like any other independent person with its rights and liabilities. The
motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what
those rights and liabilities are.

- In a popular sense, a company may in every case be said to carry on business for and on behalf of its members;
but this certainly does not in point of law constitute the relation of principal and agent between them or
render the shareholders liable to indemnify the company against the debts which it incurs

- Company being in law, a person quite distinct from its members, could not be regarded as an ‘alias’ or agent
or trustee for Salomon

- Company’s assets (and not the member’s assets) must be applied in the payment of the debentures as a secured
creditor is entitled to payment out of the assets on which his debt is secured in priority to unsecured creditors
 T ea
i
ol 13 FACTS:
n d R
e Ko ) IL A tea garden jointly owned by eight gentlemen was transferred to the Kondoli Tea Company for certain
T h 886
re (1 3
In tate al. 4 consideration. These eight gentlemen were also the only shareholders of this transferee company. The
Es C consideration was payable in shares and debentures of the transferee-company. It was contended that this
was not really a conveyance or transfer by way of sale, but a mere handing over of the property from one
name to one’s own self under another name.
A bit of History? http://assamco.com/?page_id=465
ISSUE:
What was the real transaction? Because the only shareholders in the Kondoli Tea Company were the 8 gentlemen who conveyed the estate, and
that therefore it was not really a conveyance or transfer by way of sale, but a mere handing over of the property from them in one name to
themselves under another name.

HELD:
This is a fallacy. Whoever the shareholders in the Kondoli Tea company Ltd., were, the Kondoli Tea Company Ltd., was a, separate
person, a separate body, and a conveyance to the Kondoli Tea Company Ltd., of property which was the property of the sharers in
their individual capacity, was just as much a conveyance, a transfer of the property as if the shareholders in the Company had been
totally different persons. The Kondoli Tea Company Ltd., is a separate body; and for the purpose of seeing what their transactions
are, I do not think it is possible to look at the Register of Shareholders to ascertain who the shareholders were; and, consequently,
although the conveying parties here were the shareholders of the Company, there was just as much a sale and transfer of the
property and a change of ownership as there would have been if the shareholders had been different persons.
 Air FACTS:
e e’ ited,
s
v . L im 2 A company was formed for the purpose of manufacturing aerial top dressings. Out of 3,000
L
Lee ing .C. 1
rm A shares, 2, 999 shares were held by Lee as the sole governing director. He was also appointed as
Fa 961) the official pilot of the company. Lee was killed while piloting the company’s aircraft, and his
(1
widow claimed compensation for his death under the (United Kingdom) Workmen
Compensation Act. The company opposed the claim on the grounds that Lee was not a
‘worker’ per se as the same person could not be employer and the employee at the same time.

ISSUE:

Was the company merely an agent under the leadership of Lee, thus, not entitled to receive compensation?

HELD

The same principle of Salomon was applied – The Co. was a different entity – The Co. is not an agent of the
members or its employees. Lee had a contractual relationship with the company and died while working for
the company as an employee – master and servant.

Compensation was paid

 1. Gilford motor company ltd v. Horne (1933) - 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 in his wife's name and solicited the customers of the company. The
company brought an action against him. The whole of Company’s shares were allotted to his wife and an
employee of the company, who were appointed its directors. The Court of appeal was of the view that……?
LEGAL IDENTITY

2. Jones v. Lipman - a man contracted to sell his land and thereafter changed his mind - in order to avoid an order
of specific performance he transferred his property to a company. The property now fell under the ownership of
the company and he was not personally liable. The buyer sued the man and the Court held that…….?

3. Discuss
 QUESTION

Facts
Lipman agreed to sell a property to Jones for £5,250, but subsequently changed his mind. He then formed his own company,
which had £100 in capital, and made himself the director and owner. He then transferred the land, which he had agreed to sell to
Jones, to this sham company for £3,000. To enable such a transaction, Lipman had borrowed over half the money needed by
way of a bank loan, and the remainder was owed to other sources. Under the Rules of the Supreme Court Order 14A, the
purchaser applied for specific performance to be carried out against the vendor and the vendor’s company for the transfer of the
property in question.
Issues
The court was required to decide if an order of specific performance could be enforced in the circumstances. Specifically , it was
important for the court to assess the company that Lipman had created and the transaction of the sale of the property to see if it
was equitable. The court also had to establish whether it was appropriate for the Rules of the Supreme Court to be applied to
the circumstances
 H E L D

• Firstly, the court held that the Rules of the Supreme

Court could apply to the circumstances. Further to this, it
was found that the defendant’s company was created by the
defendant as ‘a mask to avoid recognition by the eye of
equity’ (at p.836) and on this basis, a requirement of specific
performance could not be avoided. It was clear that the
defendant had control of the sham company which held the
property, and therefore Lipman was the only individual who
could perform the agreement.
• The judge described the company as ‘the creature of
[Lipman], a device and a sham, a mask which he holds
before his face in an attempt to avoid recognition by the eye
of equity’.
• So, in these circumstances, the judge ignored the corporate
veil for the purposes of the defendant’s argument. He
followed the reasoning in Gilford v Horne and ordered
specific performance. Is the mask finally out?
 The advantages of a corporate personality exist only to those who use it Woolfson v Strathclyde Regional
Council 1978 S.C. 2 (HL) 90, at page 96: “it is appropriate to pierce the corporate veil only where special
circumstances exist indicating that it is a mere facade concealing the true fact….
LIFTING THE CORPORATE VEIL

If a company follows proper laws, makes an honest use of the company – it is clothed with a legal personality.
In case of a dishonest and fraudulent use of the facility of incorporation, the law lifts the corporate veil and
identifies the persons (members) who are behind the scene and responsible for the penetration of fraud.

The term lifting the corporate veil has been defined as “looking behind the company as a legal person, that is,
disregarding the corporate entity and paying regard, instead, to the realities behind the legal façade.

“The concept of lifting the corporate veil is a changing concept. The veil of corporate personality, even though
not lifted sometimes, is becoming more and more transparent in modern jurisprudence. It is high time to
reiterate that, in the expanding horizon of modern jurisprudence, lifting of the corporate veil is permissible; its
frontiers are unlimited. But it must depend primarily upon the realities of the situation.” The corporate veil may
be lifted where a statute itself contemplates lifting the veil, or fraud or improper conduct is intended to be
prevented, or a taxing or beneficent statute is sought to be evaded or where associated companies are
inextricably connected as to be, in reality, part of one concern.
 HOLDING AND SUBSIDIARY COMPANY

• Just because a company purchases almost the entire

shareholding of another company, it does not end the
separate corporate personality of either of those
companies.
• They have to be treated as separate entities for the
purposes of their rights and liabilities.
• However, when a subsidiary does not enjoy any real
autonomy, in the determination of its course of action
in the market, it is possible to say that it does not have
a personality of its own and it shares the personality of
its parent company. Hackbridge – Hewittic & Easun
Ltd v GEC Distribution Transformers (1992) 74
Comp Cas 543 (Mad).
 H O L D I N G A N D S U B S I D I A RY

• The tendency of the courts is to ignore their separate legal entity and instead look at the
economic entity of the group as a whole, where there is identify or community of interest
between companies within the group, especially where they are related as a holding company
and a wholly owned subsidiary. Harold Holdsworth &Co (Wakefield) Ltd., v. Lomdon
Borough of Tower Hamlets (1955) 1 All ER 725 (HL).

• While associated companies constitute the genus, a special species thereof is the holding and
subsidiary company relationship, which necessarily implies great control by former over the
latter.
 In Delhi Development Authority v. Skipper Construction Company Pvt. Ltd., the company failed to pay the full
purchase price of a plot to the DDA. In addition, construction was started and space sold to various persons.
L I F T I N G T H E C O R P O R AT E V E I L

The two sons of the directors who had businesses in their own names claimed that they had separated from the
father and the companies they were running had, in fact, nothing to do with the properties of the parents. But no
satisfactory proof in support of their claim could be produced. What could be the holding of the case?

Merchandise Transport Ltd. v. British Transport Commissioner (1962) 2QB 173 – a transport company wanted
to obtain licenses for its vehicles but it was not entitled to apply in its own name. It, therefore, formed a
subsidiary company and applications for licenses were made in the name of the subsidiary. After obtaining the
licenses, they were to be transferred to the parent company. Application was rejected – why?

1. It was held that the transfer of the shareholding between the father and the sons must be treated as a sham.
The fact that the director and members of his family had created several corporate bodies did not prevent
the court from treating all of them as one entity belonging to and controlled by the director and his family.

2. The subsidiary and the parent were acting as one unit – subsidiary was to obtain an advantage for the
parent company.
 - The court will pierce the corporate veil or will ignore the corporate veil to reach the person behind the
EXCEPTION TO THE RULE - LIFTING THE CORPORATE VEIL

veil or reveal the true form and character of the concerned company.

Courts use this sparingly as it is difficult to lay down the exact reasons for which a court will definitely lift the
corporate veil, it depends on the facts and circumstances of the case –

Some instances:

a. Against public Policy and welfare legislations

b. Where the Co. is merely acting as an agent of the members
c. To defraud creditors
d. To circumvent the law
e. Where subsidiary is acting as an agent of the holding co. – whereas, they are 2 separate entities

LIC v. Escorts Ltd., (1986) I SCC 264 - A group of 13 companies incorporated abroad separately applied for
permission under the Foreign Exchange Regulation Act, 1974 for investment in Indian companies. The Act on
the one hand, encouraged flow of such investment from non-resident Indians, and, on the other imposed a
ceiling so that the privilege may not be used to destabilize Indian companies. It was contended that all 13
companies belonged to one family trust. How would this make a difference?
 Exceptions to the Corporate Veil
Rule

Statutory Provisions

1. Misrepresentation in a prospectus
Statutory Judicial
2. Failure to Return Application Money
Provisions Interpretations
3. Misdescription of Name (Section 12)
4. Punishment for Contravention of Section 73 or 76
5. For investigation of Ownership of Company
6. Fraudulent Conduct
7. Liability for ultra vires Acts
8. Liability under other Statutes
 M I S R E P R E S E N TAT I O N IN A PROSPECTUS

• Section 2(70), defines “prospectus” as “any document characterized or

distributed as a prospectus, including notices, circulars, and documents,
as well as ads presenting an invitation to purchase or subscribe stocks.”
• Person authorising such prospectus shall be liable.
• Section 34 & 35 – Civil and Criminal Liability
• Example - DLF issued its IPO, and it was alleged later that DLF failed to
disclose “material facts” related to its associate companies. The
management failed to disclose Felicite, Sudipti, and Shalika as their
subsidiaries. They suppressed valuable information related to FIR, related
party transactions, and other financial matters. This led to “misstatement
in their prospectus.” As a result, the Securities Exchange Board of India
imposed a heavy penalty of Rs. 86 Crore on DLF, its chairperson, and
other management officials for non-disclosure of essential information in
their prospectus
 FA I L U R E T O R E T U R N A P P L I C AT I O N M O N E Y

Companies (Prospectus and Allotment of Securities) Rules, 2014

Rule 11 Refund of Application Money —
(1) If the stated minimum amount has not been subscribed and the
sum payable on application is not received within the period In case of issue of shares by the Company to the public if
specified therein, then the application money shall be repaid within a minimum subscription, as stated in the prospectus has not been
period of fifteen days from the closure of the issue and if any such received w/i 30 days of Issue of the Prospectus or such other
money is not so repaid within such period, the directors of the period as may be specified by SEBI.
company who are officers in default shall jointly and severally be
liable to repay that money with interest at the rate of fifteen percent
per annum.
(2) The application money to be refunded shall be credited only to
the bank account from which the subscription was remitted.
 P U N I S H M E N T F O R C O N T R AV E N T I O N OF SECTION 73 OR 76

Section 73 Prohibition on acceptance of deposits from public—

(1) On and after the commencement of this Act, no company shall invite, accept or renew deposits under this Act from the public except in a manner
provided under this Chapter:
Provided that nothing in this sub-section shall apply to a banking company and nonbanking financial company as defined in the Reserve Bank of India
Act, 1934 (2 of 1934) and to such other company as the Central Government may, after consultation with the Reserve Bank of India, specify in this
behalf.
(2) A company may, subject to the passing of a resolution in general meeting and subject to such rules as may be prescribed in consultation with the
Reserve Bank of India, accept deposits from its members on such terms and conditions, including the provision of security, if any, or for the repayment
of such deposits with interest, as may be agreed upon between the company and its members, subject to the fulfilment of the following conditions,
namely:—
(a) issuance of a circular to its members including therein a statement showing the financial position of the company, the credit rating obtained, the
total number of depositors and the amount due towards deposits in respect of any previous deposits accepted by the company and such other
particulars in such form and in such manner as may be prescribed;
(b) filing a copy of the circular along with such statement with the Registrar within thirty days before the date of issue of the circular;
(c) depositing such sum which shall not be less than fifteen per cent. of the amount of its deposits maturing during a financial year and the financial
year next following, and kept in a scheduled bank in a separate bank account to be called as deposit repayment reserve account;
(d) providing such deposit insurance in such manner and to such extent as may be prescribed;
(e) certifying that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this
Act or payment of interest on such deposits; and
(f) providing security, if any for the due repayment of the amount of deposit or the interest thereon including the creation of such charge on the
property or assets of the company
 P U N I S H M E N T F O R C O N T R AV E N T I O N O F S E C T I O N 7 3 O R 7 6

Section 76 - Acceptance of deposits from public by certain companies.—

(1) Notwithstanding anything contained in section 73, a public company, having such net worth or turnover as may be
prescribed, may accept deposits from persons other than its members subject to compliance with the requirements provided
in sub-section (2) of section 73 and subject to such rules as the Central Government may, in consultation with the Reserve
Bank of India, prescribe:
Provided that such a company shall be required to obtain the rating (including its networth, liquidity and ability to pay its
deposits on due date) from a recognized credit rating agency for informing the public the rating given to the company at the
time of invitation of deposits from the public which ensures adequate safety and the rating shall be obtained for every year
during the tenure of deposits:
Provided further that every company accepting secured deposits from the public shall within thirty days of such acceptance,
create a charge on its assets of an amount not less than the amount of deposits accepted in favour of the deposit holders in
accordance with such rules as may be prescribed.
(2) The provisions of this Chapter shall, mutatis mutandis, apply to the acceptance of deposits from public under this section.
 F O R I N V E S T I G AT I O N O F O W N E R S H I P O F C O M PA N Y

Section 216 - Investigation of ownership of company —

(1) Where it appears to the Central Government that there is a reason so to do, it may
appoint one or more inspectors to investigate and report on matters relating to the
company, and its membership for the purpose of determining the true persons— (a)
who are or have been financially interested in the success or failure, whether real or
apparent, of the company; or (b) who are or have been able to control or to materially
influence the policy of the company.
Inspectors may be appointed to investigate and report on
the membership of any company for the purpose of
determining the true persons who are financially interested
in the company and who control its policy or materially
influence it.

(2) Without prejudice to its powers under sub-section (1), the Central Government shall
appoint one or more inspectors under that sub-section, if the Tribunal, in the course of Who can be Appointed as an Inspector?
any proceeding before it, directs by an order that the affairs of the company ought to be
investigated as regards the membership of the company and other matters relating to Rule 3 of the Companies (Inspection, Investigation and
the company, for the purposes specified in sub-section (1). Inquiry) Rules, 2014, the Central Government may appoint
(3) While appointing an inspector under sub-section (1), the Central Government may persons having expertise in the fields of investigations,
define the scope of the investigation, whether as respects the matters or the period to cyber forensics, financial accounting, management
which it is to extend or otherwise, and in particular, may limit the investigation to accounting, cost accounting and any other fields as may be
matters connected with particular shares or debentures. necessary for the efficient discharge of Serious Fraud
(4) Subject to the terms of appointment of an inspector, his powers shall extend to the Investigation Office (SFIO) functions under the Act.
investigation of any circumstances suggesting the existence of any arrangement or
understanding which, though not legally binding, is or was observed or is likely to be
observed in practice and which is relevant for the purposes of his investigation.
 FRAUDULENT CONDUCT
Section 339 - Liability for fraudulent conduct of business
(1) If in the course of the winding up of a company, it appears that any business of
the company has been carried on with intent to defraud creditors of the company or
any other persons or for any fraudulent purpose, the Tribunal, on the application of
the Official Liquidator, or the Company Liquidator or any creditor or contributory
of the company, may, if it thinks it proper so to do, declare that any person, who is
or has been a director, manager, or officer of the company or any persons who were
knowingly parties to the carrying on of the business in the manner aforesaid shall
be personally responsible, without any limitation of liability, for all or any of the
debts or other liabilities of the company as the Tribunal may direct: Provided that
on the hearing of an application under this sub-section, the Official Liquidator or
the Company Liquidator, as the case may be, may himself give evidence or call
witnesses. (not complete Section)
In the case of Re Augustus Barnett and Son Ltd [1986], the
company operated as a wholly-owned subsidiary of a Spanish
company “Rumasa SA”. The company traded at a loss for a
number of years. It was only kept going by support from the parent
company. The parent company’s assistance was noted in the
accounts. Also, there were statements by the parent company to
provide the company with working capital.
Why its important?
“Liability under this Statute may be imposed only if it is proved
that the business of the company has been carried on with a view to
defraud the creditors”
 LIABILITY FOR ULTRA VIRES ACTS

• Directors and other officers are personally liable for all acts which they have committed on behalf of a
company if the same is ultra vires the company.

Weeks v. Propert (1893)

• A railway company invited applications for a loan on debentures, although it had already exhausted its limits
as laid down in the memorandum of association.
• On seeing the advertisement, the plaintiff offered a loan of £500 which was duly accepted by the directors.
The loan being ultra vires the company was held to be void and not binding upon the company but the
directors were held personally liable because by inserting the advertisement, they had warranted that they
had the power to borrow which they did not, in fact, possess and as such their warranty of authority was
broken
 1. Apthorpe v. Peter Schoenhofen Brewing Co. Ltd. (1899) 4 TC 41 – The Law did not permit foreigners to hold
land in New York. Despite this, an English Co. acquired the business and assets of a New York co. The
EXCEPTION TO THE RULE - LIFTING THE CORPORATE VEIL

American company to avoid legal complications and evade tax continued its American name, whereas, the
whole business was being run and financed by the English Co. All shares, except 3, were held by the English
Co. The Court lifted the corporate veil on the ground that the American Co. was merely acting as an agent of
the English Co. – The profits were taxed as the income of the English Co.

2. Official Liquidator v. Bagri Brothers Ltd. – a trader to avoid paying debts to his creditors, converted his sole
proprietorship to a company and transferred all his assets to the Co., with his wife and himself as the directors
of the company & thereafter, declared himself insolvent claiming that he had no funds to pay. The Court lifted
the corporate veil to assess the real nature. The true form & purpose of the company has to be assessed.

3. Workmen v. Associated Rubber Industry Ltd., (1985) SCC 14 – The co. created a subsidiary in order to
transfer its investments to it in order to avoid paying bonus to its workmen. The subsidiary co. had no assets or
business or income of its own except for the ones transferred by the Parent co. The SC lifted the corporate veil
and set aside the independent status of the subsidiary. It was stated that the subsidiary was merely an agent.
Avoidance of Welfare Legislations + Subsidiary acting as an agent of the holding co. are grounds for lifting the
corporate veil.
 ag ar
e nus omp FACTS:
R
v. ) 70 C
P .
of U (1991 C)
te ., (S M/s Hindustan Aluminium Corporation Ltd., (HINDALCO) established an aluminum factory at
Sta er Co 127
o w Cas Renukut in Mirzapur District, U.P. in 1959. It is the case of the respondents that it was induced to
P
do so on the assurance that cheap electricity and power would be made available. M/s
Renusagar Power Co. Ltd. a wholly owned subsidiary of HINDALCO was incorporated in 1964.
It had its own separate Memorandum and Articles of Association. This was done so that power
plant under Renusagar could generate and provide electricity to HINDALCO.

Renusagar was supplying electricity to Hindalco, alone. Steps for the expansion of the power in Renusagar so as
to match the power requirement of Hindalco's expansion were taken by Hindalco. Applications for all the
necessary sanctions and permissions were made by Hindalco. Permissions and sanctions were first intimated to
Hindalco even though Renusagar was in existence. Changes in the sanctions and/or permissions were obtained
by Hindalco and not Renusagar. Hindalco consumed about 255 MW power out of which 250 M W came from
Renusagar.

U.P. Electricity (Duty) Act in 1953, enforced a duty on the consumption of electrical energy in the State of U.P. An
amendment to the Act provided for different rates of charge on consumption and sale of electrical energy in
different capacities. Therefore, the duty levied on sale of electrical energy by licensees was different from the duty
levied on generation of electrical energy that was generated for self-consumption. Renusagar applied to the UP
govt. for an exemption but this was denied.
 ag ar
e nus omp ISSUE:
R
v. ) 70 C
P .
of U (1991 C)
te ., (S
Sta er Co 127 Whether Renusagar Power Co. was the same as the consumer i.e. Hindalco?
s
Po
w Ca Was the wholly owned subsidiary company the “own source of generation” for Hindalco or a
licensee?

HELD:

Renusagar was brought into existence by Hindalco who consumed all of the power generated. There were no other
transmission lines going anywhere. The capacity of Renusagar was made specifically for the requirements of
Hindalco. Further, power lines to Hindalco from the state grid were cut on the basis that it had its own power
source. Renusagar has no independent existence- it cannot sell power to anyone but Hindalco. The concept of lifting
the corporate veil is a changing concept. In the expanding horizon of modern jurisprudence, lifting of corporate veil
is permissible. Its frontiers are unlimited. It must, however, depend primarily on the realities of the situation. The
veil on corporate personality, even though not lifted sometimes, is becoming more and more transparent in modern
company law jurisprudence.

“Own source of generation” is an expression connected with the question of lifting or piercing the corporate veil.
The following three factors must be considered:
 ag ar
e n us omp
v. R 70 C
P ) .
of U (1991 C)
te ., (S
Sta er Co 127 HELD:
o w Cas
P

- Renusagar Power Co. was the wholly owned subsidiary of Hindalco. The former was under the complete control
of the latter, even with regard to its day-to-day affairs. This includes the undertaking of various obligations for
the running of the subsidiary company.

- Renusagar Power Co. did not indicate its independent volition at any point in time. Hindalco was the sole
consumer of the electrical energy generated by Renusagar Power Co.

- Renusagar Power Co. only generated electrical energy to the extent required by Hindalco.

Lifting the corporate veil the court held that Renusagar Power Co. was the own source of generation for Hindalco.
Thus, Hindalco and Renusagar must be considered to be one and the same entity as Hindalco seemed to take an
advantage of a regulation which otherwise, would not be available to it. The rate of sale was different for self
consumption and what Renusagar was doing here was a sale of electricity – which was shown as self consumption
of electricity.
 d v. be r
t
. L Rub 7
o
ler C yre & C 30 .
im T A
Da ntal 16) 2 FACTS:
t ine . (19
n
Co o. Ltd Continental Tyre & Rubber Co. Ltd., a German Co., was incorporated in England for selling tyres in
C
England. It supplied tyres to Daimler, a British co. The holders of the shares in Continental (except
one) and all the directors were Germans resident in Germany. One share was registered in the name of
the secretary, who was born in Germany, but resided in England and had become a naturalized British
subject. The First World War b/w England and Germany broke out – Continental brought a suit
claiming for payment of a trade debt from Daimler. Daimler alleged that Continental was an alien
enemy company and that payment of the debt would be trading with the enemy.

ISSUE:

The issue was whether the corporate veil could be lifted to know the real character? Did the Co. exist
independently of its members?
 d v. be r
t
. L Rub 7 HELD:
o
ler C yre & C 30 .
im T A As a general principle, a company incorporated in the United Kingdom is a legal entity, a
Da ntal 16) 2
t ine . (19 creation of law with the status and capacity which the law confers. It is not a natural person
n d
Co o. Lt with mind or conscience. It can be neither loyal nor disloyal. It can be neither friend nor
C enemy.
Such a company can only act through agents properly authorized, and so long as it is carrying on business in this
country through agents so authorized and residing in this or a friendly country it is, prima facie to be regarded as a
friend, and all His Majesty’s lieges may deal with it as such.
Such a company may, however, assume an enemy character. This will be the case if its agents or the persons in de
facto control of its affairs, whether authorized or not, are resident in an enemy country, or, wherever resident, are
adhering to the enemy or taking instructions from or acting under the control of enemies.
A person knowingly dealing with the company in such a case is trading with the enemy. The character of individual
shareholders cannot of itself affect the character of the company. This is admittedly so in times of peace, during
which every shareholder is at liberty to exercise and enjoy such rights as are by law incident to his status as
shareholder. It would be anomalous if it were not so also in a time of war, during which all such rights and privileges
are in abeyance. The enemy character of individual shareholders and their conduct may, however, be very material
on the question whether the company’s, agents, or the persons in de facto control of its affairs, are in fact adhering to,
taking instructions from, or acting under the control of enemies. This materiality will vary with the number of
shareholders who are enemies and the value of their holdings. The fact, if it be the fact, that after eliminating the
enemy shareholders, the number of shareholders remaining is insufficient for the purpose of holding meetings of the
company or appointing directors or other officers may well raise a presumption in this respect.
 d v. be r
t
. L Rub 7
o
ler C yre & C 30 .
im T A
Da ntal 16) 2
t ine . (19 HELD:
n
Co o. Ltd
C

In a similar way a company registered in the UK, but carrying on business in a neutral country
through agents properly authorized and resident here or in the neutral country, is prima facie to be
regarded as a friend, but may, through its agents or persons in de facto control of its affairs, assume
an enemy character. A company registered in the UK but carrying on business in an enemy country
is to be regarded as an enemy. In matters of public policy, the corporate veil may be lifted.
 kjee
anec 371
w M om
ha 72 B . FACTS:
i s
re D IR 1 9
In it A
Pet The assessee, Dinshaw Maneckjee formed 4 pvt. Ltd. companies. Each of these companies took over
a particular block of his investments. At the same time, he executed a Trust Deed which stated that
the investment of the company shall be held by him as a trustee/agent of the company. He stated
that the legal owners are his nominees, and he actually receives the interest and dividends in the
capacity of a trustee, that the interest and dividends are theirs and not his. All the shares in these
companies except for 3, were held by him. The 3 shares were held by his subordinates who were in
his complete control. The company was doing no business other than receiving dividends and
lending that to Dinshaw as a loan with an interest. No interest was actually ever paid – no record.

The Income Tax Commissioner claimed that Dinshaw retained all interest and dividends, and applied the same to
his own use. There was no record to show that he disbursed it to anyone else. It was actually his profit/dividend
which he was avoiding to be taxed by showing it as loan.

ISSUE:

Whether the corporate veil can be lifted?

 kjee
anec 371
w M om
ha 72 B . HELD
i s
re D IR 1 9
In it A The company is a separate legal entity. It would be necessary to follow that every alleged
Pet
transaction b/w individual and the company is genuine. However, there are facts which
suggest that the company in this case was formed by the assessee purely and simply as a
means of avoiding super-tax and that the company was nothing more than the assessee
himself. It did no business but was created purely and simply as a legal entity to ostensibly
receive the dividends and interest and hand them over to the assessee as pretended loans.

The assessee was receiving under the guise of loans or advances the profits which were made by the company
which he controlled and in which he held all the shares except three which were held by his subordinates. The
company was created by him merely, so that he could make entries in the company's books suggesting that it
received the interest and dividends and paid them as loans whilst in reality the receipt of dividends and interest, if
it could be called the business of the company, was its only business and was in fact the business of the assessee
himself.

Under such circumstances, the company cannot be regarded as carrying on its business separate from that of the
assesse.

Held, the company was not a genuine co.

 he rn 5)
N ort (192
a v. any FACTS
r p
a cau Com 19 .
M nce C 6 The owner of a timber estate sold the whole of the timber to a timber company in
s ura A
As consideration of fully paid up shares in the company. Subsequently with several
insurance companies he insured this timber against fire - effected in his own name. A great
part of the timber was destroyed by fire - he sued the insurance companies to recover the loss,
but the actions were stayed and the matter was referred to arbitration in pursuance of the
conditions in the policies.
The claimant was the sole shareholder in the company and was also a creditor of the company to a large extent.
The arbitrator held that the claimant had no insurable interest in the goods insured, either as shareholder or
creditor, and disallowed the claim.

ISSUES:

The appellant claimed to lift the corporate veil to ensure insurable interest in the goods as that was the sole asset
of the company and all of it was contributed by the Appellant.
 h e rn 5)
N ort (192 HELD
v. n y
ura
m pa . ownership is not necessary for insurable interest. So to confine it would be adding a
a ca Co 19 Legal
M nce C 6 restriction to a contract of insurance which does not arise out of its nature. To be interested in
s ura A
As the preservation of a thing is to be so circumstanced with respect to it as to have benefit from
its existence, prejudice from its destruction. If there is a legal certainty of loss arising from the
destruction of the property insured then there is an insurable interest. A shareholder in a
company is entitled to insure the goods of the company to the extent of his holding in order
to protect the value of his shares.
However, neither a simple creditor nor a shareholder in a company has any insurable interest in a particular asset
which the company holds.

It is true that the timber was owned by the company, but practically the whole interest in the company was owned
by the appellant. He would receive the benefit of any profit and on him would fall the burden of any loss. But the
principles on which the decision of this case rests must be independent of the extent of the interest held. The
appellant could only insure either as a creditor or as a shareholder in the company. And if he was not entitled in
virtue of either of these rights he can acquire no better position by reason of the fact that he held both characters.
The appellant’s position as shareholder, must be independent of the extent of his share interest. If he were entitled
to insure holding all the shares in the company, each shareholder would be equally entitled, if the shares were all
in separate hands. Now, no shareholder has any right to any item of property owned by the company, for he has
no legal or equitable interest therein.
 he rn 5)
N ort (192
a v. any
ur m p
c a o
Ma nce C C 619
s ura A
As HELD

.
He is entitled to a share in the profits while the company continues to carry on business and a share in
the distribution of the surplus assets when the company is wound up. If he were at liberty to effect an
insurance against loss by fire of any item of the company’s property, the extent of his insurable interest
could only be measured by determining the extent to which his share in the ultimate distribution
would be diminished by the loss of the asset - a calculation almost impossible to make. There is no
means by which such an interest can be definitely measured and no standard which can be fixed of the
loss against. The corporate veil was not lifted.
 rc es
e so u 4 FACTS:
R
el SC 3
d
e t ro ] U K An appeal arose out of proceedings for ancillary relief following a divorce. The parties were
v P 13
e st ,   [ 2 0 Michael and Yasmin Prest. They were married in 1993, and during the marriage the matrimonial
r
P L td
home was in England. There was also a second home in Nevis. The wife petitioned for divorce in
March 2008.
.
The appeal concerns only the position of a number of companies belonging to the group known as the Petrodel
Group which the judge found to be wholly owned and controlled (directly or through intermediate entities) by the
husband. There were originally seven companies involved - Petrodel Resources Ltd ("PRL"), Petrodel Resources
(Nigeria) Ltd ("PRL Nigeria"), Petrodel Upstream Ltd ("Upstream"), Vermont Petroleum Ltd ("Vermont"), Elysium
Diem Ltd, Petrodel Resources (Nevis) Ltd ("PRL Nevis") and Elysium Diem Ltd (Nevis). Three of these companies,
PRL, Upstream and Vermont, all incorporated in British Isle, are the respondents. PRL was the legal owner of the
matrimonial home, which was bought in the name of the company in 2001 but was found by the judge to be held
for the husband beneficially. There is no longer any issue about that property, which is apparently in the process of
being transferred to the wife. In addition, PRL was the legal owner of five residential properties in the United
Kingdom and Vermont is the legal owner of two more.

Matrimonial Causes Act 1973 confers wide powers on the court to order ancillary relief in matrimonial
proceedings. S. 23 provides for periodical and lump sum payments to a spouse or for the benefit of children of the
marriage. Under section 24(1)(a), the court may order that "a party to the marriage shall transfer to the other
party... such property as may be so specified. The Judge of the lower court, Moylan J. opined that he under this
section had the authority to order the husband to transfer the 7 seven properties in the name of the wife
 r c es
es ou 4
d el R SC 3 .
o
P etr 3] UK
t v  [201 ISSUE:
es
Pr Ltd,
Whether
. the court has power to order the transfer of these seven properties to the wife given
that they legally belong not to him but to his companies?

HELD:

Maylon J. of Court of Appeal – held that the husband should transfer the 7 properties - because, the husband
during the proceedings either ignored, evaded or tired to conceal the extent of his assets in the course of his
evidence, and the collusive proceedings by which he sought declarations that certain of the companies were held
in trust for his siblings. However, a seven-member panel of the UK Supreme Court unanimously overturned the
Court of Appeal’s judgment – which was largely delivered by Lord Sumption.

Lord Sumption stated that the ownership of the respondent companies proved to be more difficult to establish.
The husband did not admit to having any personal interest in the shares of any company of the group, and
declined to say who the ultimate shareholders were. Substantially all of the issued shares of PRL are owned by
PRL Nigeria. Almost all the shares of that company are owned by PRL Nevis, a company about which very little
is known, but whose accounts show substantial balances, apparently derived from trading.
 rc es
e sou 4 HELD:
elR C3
d S
etro ] UK . The husband's evidence was that the shares of PRL Nevis were owned by its own subsidiary
v P 13
re s , [20
t PRL Nigeria. The judge described this as "puzzling" but made no finding as to whether it
P Lt d
was true. It was suggested that PRL Nevis was owned by a family trust about which,
however, nothing was disclosed. The judge cut through the complexities of the corporate
structure by accepting the evidence of the wife that the husband was the true owner of the
Petrodel Group, as he had always told them he was, even if the exact means by which he
held it remained obscure.
That accounted for PRL, PRL Nigeria and PRL Nevis and Vermont whose shares were held 49% by PRL and 51%
by PRL Nigeria. The judge found that the husband had "unrestricted access" to the companies' assets, unconfined
by any board control or by any scruples about the legality of his drawings. He used PRL's assets to fund his and
his family's personal expenditure, including the substantial legal costs incurred in these proceedings. The group
was "effectively … the husband's money box which he uses at will.“

Denning LJ in a famous dictum in Lazarus Estates Ltd v Beasley [1956] 1 QB 702, 712:
"No court in this land will allow a person to keep an advantage which he has obtained by fraud. No judgment of
a court, no order of a Minister, can be allowed to stand if it has been obtained by fraud. Fraud unravels
everything. The court is careful not to find fraud unless it is distinctly pleaded and proved; but once it is proved,
it vitiates judgments, contracts and all transactions whatsoever…"
 rc es
e sou 4
elR C3 HELD :
o d K S
P etr 3] U "Piercing the corporate veil" is an expression rather indiscriminately used to describe a number of different things.
v 0 1
re s t , [ 2 Properly speaking, it means disregarding the separate personality of the company. There is a range of situations in
P Lt d which the law attributes the acts or property of a company to those who control it, without disregarding its separate
legal personality. The controller may be personally liable, generally in addition to the company, for something that
he has done as its agent or as a joint actor.
.
Property legally vested in a company may belong beneficially to the controller, if the arrangements in relation to the property are such as to make
the company its controller's nominee or trustee for that purpose. Equitable remedies, such as an injunction or specific performance may be
available to compel the controller whose personal legal responsibility is engaged to exercise his control in a particular way. But when we speak of
piercing the corporate veil, we are not (or should not be) speaking of any of these situations, but only of those cases which are true exceptions to
the rule in Salomon v A Salomon and Co Ltd [1897] AC 22, i.e. where a person who owns and controls a company is said in certain
circumstances to be identified with it in law by virtue of that ownership and control.

Importantly, in this instance the ownership of the properties was vested in the companies prior to the breakdown of the marriage, and there was
no evidence that the husband's actions in arranging for the companies to own the properties was intended to evade any obligation to his wife
connected with the divorce proceedings. The Court therefore held that there was no 'relevant impropriety' on the part of the husband
sufficient to 'pierce the corporate veil'. The purpose of the corporate structure was wealth protection and the avoidance of tax but nothing more.
 r c es
e sou 4
elR C3 HELD:
o d K S
P etr 3] U It was submitted that the authorities justified piercing the corporate veil in three, possibly overlapping, cases:
s t v 201
[
Pre Ltd,  (i) where the company was a "facade or sham";
(ii) where the company was involved in some form of impropriety; and
(iii) where it was necessary to do so in the interests of justice. In each of these cases, the right of the court to pierce the
. corporate veil was said to be subject to there being no third party interests engaged, such as unconnected minority
shareholders or creditors.

Munby J formulated six principles at paras 159-164 in A v. A which he considered could be derived from them:
(i) ownership and control of a company were not enough to justify piercing the corporate veil
(ii) the court cannot pierce the corporate veil, even in the absence of third party interests in the company, merely because it is thought to be
necessary in the interests of justice;
(iii) the corporate veil can be pierced only if there is some impropriety;
(iv) the impropriety in question must, as Sir Andrew Morritt had said in Trustor, be "linked to the use of the company structure to avoid or
conceal liability";
(v) to justify piercing the corporate veil, there must be "both control of the company by the wrongdoer(s) and impropriety, that is (mis)use of
the company by them as a device or facade to conceal their wrongdoing"; and
(vi) the company may be a "facade" even though it was not originally incorporated with any deceptive intent, provided that it is being used for
the purpose of deception at the time of the relevant transactions. The court would, however, pierce the corporate veil only so far as it was
necessary in order to provide a remedy for the particular wrong which those controlling the company had done. n my view, the principle that
the court may be justified in piercing the corporate veil if a company's separate legal personality is being abused for the purpose of some
relevant wrongdoing is well established in the authorities.
 rc es
e sou 4
elR C3 HELD:
o d K S
P etr 3] U
t v 201 Moylan J. considered that it was enough to justify his order to transfer the properties that the
s [
Pre Ltd,  husband should have the practical ability to procure their transfer, whether or not he was their
beneficial owner. He found that this was established in the present case because of the power
which the husband had over the companies by virtue of owning and controlling them. The judge
.
did not make any finding about whether the properties of the corporate respondents were held in
trust for the husband, except in the case of the matrimonial home in Warwick Avenue, which he
found to be beneficially his
What he held was that the assets of the companies were "effectively" the husband's property, because he treated
them as such. He was "able to procure their disposal as he may direct, based again on his being the controller of the
companies and the only beneficial owner." The judge accepted that as a matter of company law, the husband as
shareholder had no more than a right of participation in accordance with the company's constitution, and that that
did not confer any right to any particular property of the company. "But, what if the shareholder is, in fact, able to
procure the transfer to them of a particular item of company property, such as a matrimonial home," the judge
asked, "as a result of their control and ownership of the company and the absence of any third party interests." The
judge's answer to that question was that the "purpose and intention" of the Matrimonial Causes Act 1973 was that
the companies' assets should be treated as part of the marital wealth. "Effectively", he said, "the husband, in respect
of the companies and their assets, is in the same position he would be in if he was the beneficiary of a bare trust or
the companies were his nominees.
 rc es
e sou 4
lR C3 HELD:
d e S
etro ] UK The difficulty is to identify what is a relevant wrongdoing. References to a "facade" or "sham"
v P 13
e s t , [ 20 beg too many questions to provide a satisfactory answer. It seems to me that two distinct
r
P Lt d
principles lie behind these protean terms, and that much confusion has been caused by failing
to distinguish between them. They can conveniently be called the concealment principle and
. the evasion principle. Moylan J laid down:
The concealment principle is legally banal and does not involve piercing the corporate veil at all. It is that the interposition of a
company or perhaps several companies so as to conceal the identity of the real actors will not deter the courts from identifying
them, assuming that their identity is legally relevant. In these cases the court is not disregarding the "facade", but only looking
behind it to discover the facts which the corporate structure is concealing. The evasion principle is different. It is that the court
may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the
company's involvement, and a company is interposed so that the separate legal personality of the company will defeat the right
or frustrate its enforcement. Many cases will fall into both categories, but in some circumstances the difference between them
may be critical. This may be illustrated by reference to those cases in which the court has been thought, rightly or wrongly, to
have pierced the corporate veil.

The broader principle is that the corporate veil may be pierced only to prevent the abuse of corporate legal
personality. It may be an abuse of the separate legal personality of a company to use it to evade the law or to
frustrate its enforcement. It is not an abuse to cause a legal liability to be incurred by the company in the first place.
It is not an abuse to rely upon the fact (if it is a fact) that a liability is not the controller's because it is the company's.
On the contrary, that is what incorporation is all about.
 rc es
e sou 4 HELD:
elR C3
d S
etro ] UK I conclude that there is a limited principle of English law which applies when a person is
v P 13
re st , [20 under an existing legal obligation or liability or subject to an existing legal restriction which he
P Lt d deliberately evades or whose enforcement he deliberately frustrates by interposing a company
under his control. The court may then pierce the corporate veil for the purpose, and only for
. the purpose, of depriving the company or its controller of the advantage that they would
otherwise have obtained by the company's separate legal personality.
It was held that he could not pierce the corporate veil under the general law without some relevant impropriety, and declined to
find that there was any. The husband has acted improperly in many ways. In the first place, he has misapplied the assets of his
companies for his own benefit, but in doing that he was neither concealing nor evading any legal obligation owed to his wife.
Nor, more generally, was he concealing or evading the law relating to the distribution of assets of a marriage upon its
dissolution. It cannot follow that the court should disregard the legal personality of the companies with the same insouciance as
he did. Secondly, the husband has made use of the opacity of the Petrodel Group's corporate structure to deny being its owner.
But that, is simply [the] husband giving false evidence." It may engage the concealment principle, but that simply means that
the court must ascertain the truth that he has concealed, as it has done. The problem in the present case is that the legal interest
in the properties is vested in the companies and not in the husband. They were vested in the companies long before the marriage
broke up. Whatever the husband's reasons for organizing things in that way, there is no evidence that he was seeking to avoid
any obligation which is relevant in these proceedings. The judge found that his purpose was "wealth protection and the
avoidance of tax". It follows that the piercing of the corporate veil cannot be justified in this case by reference to any general
principle of law
 otan t.
v . G Pv
th an dyog
ajas nji U FACTS
R a
t e of e K h d
Sta Ston Lt
m e Gotan Limestone Khanji Udhyog (GKLU) was a partnership firm with a mining lease from the
Li
Government, which it transferred to a private limited company Gotan Limestone Khanji Udhyog Pvt. Ltd.
.
(GLKUPL). GLKUPL was incorporated through conversion of the partnership firm into a private limited
company. The partners became the directors of the company, and GLKUPL sought permission to transfer
mining lease stating that the incorporation was a mere change of form of its own business by converting
itself from a partnership firm into a private limited company and the transfer of the lease from the firm to
the company did not involve any consideration. After obtaining permission to transfer lease from the
concerned authority,the shareholders of GLKUPL sold all of their shares in the company to a subsidiary of
Ultra Tech Cement Company Limited (UTCL) for INR 160 crores. This meant that GLKUPL effectively
sold the mining lease to UTCL, in the disguise of a transfer of shareholding. The Government of Rajasthan
challenged the transaction before the Rajasthan High.
 HELD

• The division bench of the High Court upheld the transactions on the ground that the company is a
separate legal personality and that a transfer of shares among shareholders does not mean transfer of
the mining lease since the lease remains with the transferred company.
• On appeal before the Supreme Court, the Supreme Court quashed the transaction by lifting the
corporate veil of GLKUPL. The Court noted that in the present case there are two transactions. In
first transaction of transfer of lease from the firm to the company, with the permission of the
competent authority, only disclosure made while seeking permission for transfer is of transforming
partnership business into a private limited company with same partners as directors without there
being any financial consideration for the transfer and without there being any third party. In the
second transaction, the entire shareholding is transferred for share price and control of mining lease
is acquired by the holding company without any apparent price for lease.
 rs v og
O dy FACTS:
&
t han nji U
ajas e Kha . - Gotan Limestone Khanji Udhyog (GLKU), a partnership firm, held a mining lease for
of R ston Anr mining limestone at village Dhaappa, Nagaur. The said lessee applied for transfer of
ta te ime d. &
S n L . Lt the lease in favour of Gotan Limestone Khanji Udhyog Pvt. Ltd. (GLKUPL) which was
o ta Pvt nothing but the change in the form of GLKU i.e. a case of a partnership becoming a
G
limited company on 28th March, 2012. The partners of the firm and Directors of the
.
company were the same.
The newly formed private limited company to which the mining leases were transferred, instead of operating the
mining lease itself sold its entire shareholding to another company allegedly for Rs. 160 crores which is alleged to be
the sale price of mining lease. The company subsequently became a subsidiary of Ultra Tech Cement Limited
Company (UTCL) which was quoted on the Bombay Stock Exchange. There were also allegations that the
partnership firm had not revealed the true facts that led to the sale of the company.

Ultimately, the competent authority held that the transfer of mining rights was in violation of Rule 15 of the
Rajasthan Minor Mineral Concession Rules, 1986 (the Rules) the sum and substance being that the erstwhile partners
of the firm which was original lessee, had in effect transferred the lease in favour UTCL.

ISSUE:

The question was whether in the sale of the shares to UTCL, whether it was a sale of a company or whether it was in
substance a sale of mining lease which amounted to violation of Rule 15?
 rs v og
O dy HELD
&
t han nji U
ajas e Kha . - The Supreme Court held that there were two transactions ostensibly, i.e.  (a) transfer
of R ston Anr
a te ime d. & of lease from the firm to the company, with the permission of the competent
t
S n L . Lt authority, and (b) transfer of shares to UTCL., realistically, it was nothing but a
o ta Pvt
G transfer of mining lease to UTCL without the approval of the State Government. In
. other words,  the lessee has achieved indirectly what could not be achieved directly
by concealing the real nature of the transaction.

The Supreme Court further held that the principle of lifting the corporate veil as an exception to the distinct
corporate personality of a company or its members is well recognized not only to unravel tax evasion but also
where protection of public interest is of paramount importance and the corporate entity is an attempt to evade
legal obligations and lifting of veil is necessary to prevent a device to avoid welfare legislation. Citing the case
of  State of U.P. v. Renusagar Power Co. [1988] 4 SCC 59 in which it was noted that  “It is high time to reiterate
that in the expanding horizon of modern jurisprudence, lifting of corporate veil is permissible. Its frontiers are
unlimited. It must, however, depend primarily on the realities of the situation. The aim of the legislation is to do
justice to all the parties. The horizon of the doctrine of lifting of corporate veil is expanding………”. 

In the present case, the original lessee sought transfer merely by disclosing that the partnership firm was to be
transformed into a private limited company with the same partners continuing as directors and there was no
direct or indirect consideration involved.
 rs v og
O dy
&
t han nji U
a jas e Kha . -
of R ston Anr
ta te ime d. &
S n L . Lt HELD
ta t
Go Pv
.
It was specifically declared that no pecuniary advantage was being taken in the process which is clearly false.
The permission to transfer the lease in favour of a private limited company was granted on that basis. Thus, it
was a case of suppression of facts. Once it is held that transfer of lease is not permissible without permission of
the competent authority, the competent authority was entitled to have full disclosure of facts for taking a
decision in the matter so that a private person does not benefit at the expense of public property. The original
lessee did not disclose that the real purpose was not merely to change its partnership business into a private
limited company as claimed but to privately transfer the lease by sale to a third party. Therefore, sale of
shareholding by GLKUPL to UTCL is a private unauthorized sale of mining lease which being in violation of
rules is void. GLKUPL has been formed merely as a device to avoid the legal requirement for transfer of
mining lease and to facilitate private benefit to the parties to the transaction, to the detriment of the public.”
 
 VODAFONE INTERNATIONAL HOLDINGS VS. UNION OF INDIA & ANR (2011) 198 TAXMAN 480 (SC)

1. 2.
Hutchinson Télécommunications Int. Ltd 100% CGP Investments Holdings Ltd. ["CGP"] stood
(HTIL), a unit of Hutchison Whampoa. subsidiary incorporated in Cayman Islands, Mauritius.

first invested into the

CGP held 52% of
telecom business in India
shares in HEL with an
option to buy another 3.
15%

Through JV – B/w Hutchison & Transfer of 100% shares of CGP from HTIL (1.)
Essar - by the name Hutchison Max to Vodafone International Holdings BV,
Telecom Ltd. (HMTL) - later Netherlands, vide transaction dated 11.02.2007.
renamed as HEL.

Controlled by Vodafone Group, London

 onal &
r n ati India C)
I nte Of 0 (S
ne nion an 4 8 FACTS
f o
o da vs. U axm
V gs 8T
i n 1 9
o ld 11) In 2007, the Indian tax department issued a show-cause notice to Vodafone to explain why tax
H (20
r was not paid on payments made to HTIL for acquiring stake in CGP which had the effect of
An
.
indirect transfer of assets situated in India. Capital gains should have been taxed as the purchase
was intended to buy Indian asset. Vodafone filed a writ petition in the Bombay HC challenging
the jurisdiction of the tax authorities

Bombay HC, ruled that where the underlying assets of the transaction between two or more offshore entities lies
in India, it is subject to capital gains tax under relevant income tax laws in India. Vodafone appealed before the
SC.

ISSUE:

Can the corporate veil be lifted to know the real essence of the transfer?
 onal &
r n ati India C)
I nte Of 0 (S HELD
ne o n 4 8
da fo . Uni man
Vo gs vs 8 Tax
ld in 1) 19 When it comes to taxation of a Holding Structure, at the threshold, the burden is on the Revenue
Ho (201 to allege and establish abuse, in the sense of tax avoidance in the creation or use of such
r
An structure(s). In the application of a judicial anti-avoidance rule, the Revenue may invoke the
.
“substance over form” principle or “piercing the corporate veil” test only after it is able to
establish on the basis of the facts and circumstances surrounding the transaction that the
impugned transaction is a sham or tax avoidant.
To give an example, if a structure is used for circular trading or round tripping or to pay bribes then such
transactions, though having a legal form, should be discarded by applying the test of fiscal nullity. Similarly, in a
case where the Revenue finds that in a Holding Structure an entity which has no commercial/business substance
has been interposed only to avoid tax then in such cases applying the test of fiscal nullity it would be open to the
Revenue to discard such inter-positioning of that entity. However, this has to be done at the threshold. In this
connection, we may reiterate the “look at” principle which states that the Revenue or the Court must look at a
document or a transaction in a context to which it properly belongs to.

It is the task of the Revenue/Court to ascertain the legal nature of the transaction and while doing so it has to look
at the entire transaction as a whole and not to adopt a dissecting approach. Thus, whether a transaction is used
principally as a colourable device for the distribution of earnings, profits and gains, is determined by a review of
all the facts and circumstances surrounding the transaction
 onal &
r n ati India C)
I nte Of 0 (S HELD
ne o n 4 8
da fo . Uni man
Vo gs vs 8 Tax The Revenue cannot start with the question as to whether the impugned transaction is a tax
ld in 1) 19
Ho (201 deferment/saving device but that it should apply the “look at” test to ascertain its true legal
r
An nature - Applying the above tests, we are of the view that every strategic foreign direct
.
investment coming to India, as an investment destination, should be seen in a holistic manner.

While doing so, the Revenue/Courts should keep in mind the following factors: the concept of participation in
investment, the duration of time during which the Holding Structure exists; the period of business operations in
India; the generation of taxable revenues in India; the timing of the exit; the continuity of business on such exit. In
short, the onus will be on the Revenue to identify the scheme and its dominant purpose.

The corporate business purpose of a transaction is evidence of the fact that the impugned transaction is not
undertaken as a colorable or artificial device. The stronger the evidence of a device, the stronger the corporate
business purpose must exist to overcome the evidence of a device. Applying the above tests to the facts of the
present case, we find that the Hutchison structure has been in place since 1994. It operated during the period 1994
to 11.02.2007. It has paid income tax ranging from `3 crore to `250 crore per annum during the period 2002-03 to
2006. This indicates “continuity” of the telecom business on the exit of its predecessor, namely, HTIL. Thus, it
cannot be said that the structure was created or used as a sham or tax avoidant. It cannot be said that HTIL or VIH
was a “fly by night” operator/short time investor.
 onal &
r n ati India C)
I nte Of 0 (S
ne nion an 4 8
f o
o da vs. U axm
V gs 8T
i n 1 9
o ld 11) HELD
H (20
r
An
.
If one applies the look at test discussed hereinabove, without invoking the dissecting approach, then, in
our view, extinguishment took place because of the transfer of the CGP share and not by virtue of
various clauses of SPA. In a case like the present one, where the structure has existed for a considerable
length of time generating taxable revenues right from 1994 and where the court is satisfied that the
transaction satisfies all the parameters of participation in investment then in such a case the court need
not go into the questions such as de facto control vs. legal control, legal rights vs. practical rights, etc.