NATIONAL LAW INSTITUTE UNIVERSITY,

BHOPAL

EIGHTH TRIMESTER

LAWS ON BUSINESS ASSOCIATIONS II

PROJECT ON

TRACING THE JUDICIAL TREND

IN LIFTING THE CORPORATE VEIL

SUBMITTED TO:

SUBMITTED BY:1 | P a g e

PROF.(Dr.) KONDIAH JONNALAGADDA

NIMISHA JHA

2009BALLB01

ENROLMENT NO.: A-0863

TABLE OF CASES

Adams v Cape Industries Ltd. [1990] Ch

433...........................................................

.............14

Badri Daga v CIT [1958] 34 ITR 10

SC............................................................

....................21

Bank of Tokyo v Karoon [1987]

(PC)..........................................................

...........................15

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Creasy v Breachwood

[1992]........................................................

..........................................15

Curtis v J & G Oldfield Ltd. [1925] 9 Tax Cas

319...........................................................

....22

DHN Food Distributors v Tower Hammels

[1976]........................................................

........14

Gencor v Dally

[2000]........................................................

.....................................................15

Gilford Motor Co. Ltd. v Horne

[1933]........................................................

..........................15

Hackbridge-Hewittic & Easun Ltd. v GEC Distribution Transformers 1990

Indlaw MAD

271...........................................................

..............................................................

...................19

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Jones v Lipman

[1962]........................................................

....................................................15

Juggilal Kamlapat v CIT, U.P. AIR 1969 SC

932...........................................................

......17

LIC v Escorts Ltd. (1986) AIR SC

1370..........................................................

.......................18

Lighting Improvement Co. Ltd. v Inland Revenue Commissioners (1923) AC

723.............11

New Horizons Ltd. v Union of India 1995 SCC (1)

478........................................................20

Ord v Bellhaven

[1998]........................................................

...................................................15

Plas Flab Pvt. Ltd. v CIT [1994] 208 ITR

154...........................................................

............22

Richter Holding v Assistant Director of Income Tax

...........................................................17

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Saloman v Saloman & Co. [1897] AC 22

(HL)..........................................................

...........11

Spencer & Co. Ltd., Madras v The Commissioner of Wealth Tax AIR 1969 Mad

359.......18

State of U.P. v Renusagar Power Co. 1988 AIR SC

1737.....................................................19

The King v Portus (1949) 79 CLR

42............................................................

.........................11

Trustor v Smallbone (No. 2)

[2001]........................................................

................................15

U.K. Mehra v Union of India AIR 1994 Del

25............................................................

........20

Woolfson v Stratheclyde BC

(1976)........................................................

................................14

Workmen, Associated Rubber Industry Ltd. v Associated Rubber Industry Ltd.

[1986] 157 ITR 77

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(SC)..........................................................

..............................................................

....18

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TABLE OF CONTENTS

INTRODUCTION..................................................

..............................................................

..05

CORPORATE VEIL:

MEANING.......................................................

................................06

THE DOCTRINE OF CORPORATE

VEIL..........................................................

.............07

THE VEIL AS A DERIVATIVE FROM SEPARATE LEGAL

CONCEPT.................08

THE CONCEPT OF LIMITED

LIABILITY.....................................................

................09

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LIFTING OF CORPORATE VEIL:

MEANING.......................................................

.......10

CONCEPTUAL EXPLANATION OF LIMITED LIABILITY VERSUS LIFTING OF

CORPORATE

VEIL..........................................................

....................................................11

LIFTING OF CORPORATE VEIL:

GROUNDS.......................................................

........12

LIFTING OF COPORATE VEIL IN

U.K...........................................................

................14

LIFTING OF CORPORATE VEIL IN

U.S.A.........................................................

............16

LIFTING OF CORPORATE VEIL IN

INDIA.........................................................

..........17

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RECENT DEVELOPMENT:

CONCLUSION....................................................

...............21

BIBLIOGRAPHY..................................................

..............................................................

..23

INTRODUCTION

One of the primary benefits of creating a corporate entity is

to limit the liability of the shareholders. However, under

certain circumstances the corporate entity may be disregarded.

This is also known as piercing the corporate veil and is the

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most frequent method for holding the shareholders liable for

the acts of a corporation.

Corporate officers, directors and controlling shareholders

have a general fiduciary duty of loyalty and care which should

govern all their corporate conduct. Unless they breach that

duty by gross negligence or acts in bad faith, they usually

will have no personal liability to third parties.

In order to pierce the corporate veil, third parties have to

show personal wrongful conduct on the part of a company

official or director to hold them personally responsible for

extra-corporate actions.

Under the doctrine of piercing the corporate veil, the courts

may decide not observe the separation of the corporate entity

from its stockholders, and it may deem the corporation's acts

to be those of the persons or organizations actually

controlling the corporation. This is based upon a finding by

the court that the corporate form is used to perpetuate a

fraud, circumvent a statute, or accomplish some other wrongful

or inequitable purpose.

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CORPORATE VEIL: MEANING

A corporate veil is a legal concept that separates the

personality of a corporation from the personalities of its

shareholders, and protects them from being personally liable

for the company's debts and other obligations.

A corporate veil, defined as the structure which protects

shareholders in a corporation from personal liability in the

event of business failure or liability, is important to

incorporated business owners. Usually these shareholders are

not responsible personally for any mistakes the business makes

because it is a private, commercial entity. However,

occasionally corporate veil piercing can occur and end with

shareholders responsible for activities of the business.

A corporate veil, explained usually as the protection which

does not exist in other unlimited liability business entities,

is a risk mitigation tool. The benefit of choosing a

corporation is the corporate veil doctrine; though owners pay

the expense of corporate double-taxation they also receive the

protection of incorporation. This benefit is recommended for

anyone who can afford the price of incorporating a business.

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Laws here provide unique benefits to processing paperwork

through this state.

A corporate veil, however, is not fool-proof. This raises the

question "how can the corporate veil be pierced"? The answer depends on

a variety of factors but follows some generalities. Situations

where a corporation exists as a shell, either for fraud,

illegal activities, or violation of legal agreements, lifting

the corporate veil can occur. In this situation the owners can

be liable, for either prosecution or damages, as though they

were acting outside of their corporation.

THE DOCTRINE OF CORPORATE VEIL

A corporation under company law or corporate law is

specifically referred to as a "legal person"- as a subject of

rights and duties that is capable of owning real property,

entering into contracts, and having the ability to sue and be

sued in its own name. In other words, a corporation is a

juristic person that in most instances is legally treated as a

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person, and empowered with the attributes to own its own

property, execute contracts, as well as ability to sue and be

sued.

One of the main motivations for forming a corporation or

company is the limited liability it offers its shareholders.

By this doctrine (limited liability), a shareholder can only

lose only what he or she has contributed as shares to the

corporate entity and nothing more.

Nevertheless, there is a major exception to the general concept of limited

liability. There are certain circumstances in which courts will

have to look through the corporation, that is, lift the veil

of incorporation, otherwise known as piercing the veil, and hold the

shareholders of the company directly and personally liable for

the obligations of the corporation.

The veil doctrine is invoked when shareholders blur the

distinction between the corporation and the shareholders. It

is worthy of note that although a separate legal entity, a

company or corporation can only act through human agents that

compose it. As a result, there are two main ways through which

a company becomes liable in company or corporate law to wit:

through direct liability (for direct infringement) and through

secondary liability (for acts of its human agents acting in

the course of their employment).

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THE VEIL DOCTRINE AS A DERIVATIVE FROM

THE SEPARATE LEGAL ENTITY CONCEPT

As aforementioned, a company once incorporated becomes a legal

personality or a juristic entity that has a separate and

distinct identity from that of its owners or members,

shareholder; and it's further empowered with its own rights,

duties and obligations, can sue and be sued in its own name,

etc.

In fact, the concept of separate legal personality goes hand

in hand with the doctrine of limited liability. The main

importance of the limited liability concept is that it

protects the company and its members, as well as to facilitate

commercial ventures in which the company may be interested. 

The principle further act to attract and encourage corporate

investment, much needed in any society to speed up

development. It is believed to be the springboard to raise

managerial standards in a corporate organization. It goes

without saying that it facilitates better investment

strategies by the company question.

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Farrar has described the concept of separate legal personality

as "...essentially a metaphorical use of language, clothing the formal group

with a single separate legal entity by analogy with a with a natural person"

THE CONCEPT OF LIMITED LIABILITY

The most important ingredient that flows from the separate

legal personality clause is that of limited liability. It is

aimed at giving investors minimum insurance in their business over their own

private lives. Hence, the most a member in the company can lose is

the amount paid for the shares themselves and thus the value

of his/her investment.

Thus, creditors who have claims against the company may look

only to the corporate assets for the satisfaction of their

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claims as creditors and generally cannot proceed against the

personal or separate assets of the members. This has the

potential effect of capping the investors' risk whilst,

consequently, their potential for gain is unlimited.

Evidently, corporations exist in part, in the first place to

shield their shareholders from personal liabilities for the

debts of that corporation.

The concept of limited liability was invented in England in the 17th century and

prior to this period; people were scared to invest in

companies because any partner in a general partnership could

be held responsible for all the debts of the corporation. As

the capital needed to finance the largest projects grew, and

along with it the necessity of raising money, investors were

reluctant to invest because of the risk involved in

essentially guaranteeing the entire debt of the business

entity.

In fact, the concept of separate legal personality goes hand in hand with

the doctrine of limited liability. The main importance of the limited

liability concept is that it protects the company and its

members, as well as to facilitate commercial ventures in which

the company may be interested. The principle further act to

attract and encourage corporate investment, much needed in any

society to speed up development. It is believed to be the

springboard to raise managerial standards in a corporate

organization. It goes without saying that it facilitates

better investment strategies by the company question.

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LIFTING OF THE VEIL: MEANING

Piercing the corporate veil or lifting the corporate veil is a

legal decision to treat the rights or duties of a corporation

as the rights or liabilities of its shareholders or directors.

Usually a corporation is treated as a separate legal person,

who is solely responsible for the debts it incurs and the sole

beneficiary of the credit it is owed. Common law countries

usually uphold this principle of separate personhood, but in

exceptional situations may "pierce" or "lift" the corporate

veil.

The phrase “piercing the corporate veil” is used to describe the action of a

court to hold corporate shareholders personally liable for the debts and

liabilities of a corporation.

Corporations are separate entities from their shareholders and

in normal circumstances, if a corporation is sued, the

individual shareholders and officers cannot be brought into

the lawsuit. But there are cases in which the corporation's

officers and shareholders could be sued for negligence or for

debts; the action of bringing in these shareholders to be sued

is called "piercing the corporate veil" or "lifting the

corporate veil."

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Courts traditionally require fraud, illegality, or

misrepresentation before they will pierce the corporate veil.

Courts also may ignore the corporate existence where the

controlling shareholder or shareholders use the corporation as

merely their instrumentality or alter ego, where the

corporation is undercapitalized, and where the corporation

ignores the formalities required by law or commingles its

assets with those of a controlling shareholder or

shareholders.

In addition, courts may refuse to recognize a separate

corporate existence when doing so would violate a clearly

defined statutory policy.

CONCEPTUAL INTERPRETATION OF LIMITED

LIABILITY VERSUS LIFTING OF THE VEIL: Incorporation by registration was introduced in 1844 and the

doctrine of limited liability followed in 1855. Subsequently

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in 1897 in Solomon v. Solomon & Company1 the House of Lords

effected these enactments and cemented into English law the

twin concepts of corporate entity and limited liability. In

that case the apex court simply laid down that a company is a

distinct legal person entirely different from the members of

that company.

In other words, by the terms of the Salomon case, members of a

company would not automatically, in their personal capacity,

be entitled to the benefits nor would they be liable for the

responsibilities or the obligations of the company.

The case is of particular significance in company law thus:

Firstly, it established the canon that when a company acts, it

does so in its own name and right, and not merely as an alias

or agent of its owners. For instance, in the later case of Gas

Lighting Improvement Co Ltd v Inland Revenue Commissioners2 rights

and/or obligations were restricted to their share of the

profits and capital invested. Lord Sumner said the following:

"Between the investor, who participates as a shareholder, and the undertaking

carried on, the law interposes another person, real though artificial, the company

itself, and the business carried on is the business of that company, and the capital

employed is its capital and not in either case the business or the capital of the

shareholders. Assuming, of course, that the company is duly formed and is not a

sham...the idea that it is mere machinery for affecting the purposes of the

shareholders is a layman's fallacy. It is a figure of speech, which cannot alter the

legal aspect of the facts."

Secondly, it established the important doctrine that

shareholders under common law are not liable the company's

1 (1896), [1897] A.C. 22 (H.L.)2 (1923) AC 723 at 740 - 74119 | P a g e

debts beyond their initial capital investment, and have no

proprietary interest in the property of the company. This has

been affirmed in later cases, such as in The King v Portus; ex parte

Federated Clerks Union of Australia, where Latham CJ while deciding

whether or not employees of a company owned by the Federal

Government were not employed by the Federal Government ruled

that:“The company…is a distinct person from its shareholders. The shareholders

are not liable to creditors for the debts of the company. The shareholders do not

own the property of the company…”

LIFTING OF THE VEIL: GROUNDSThe willingness of a court to disregard the corporate veil

depends to a large extent on the

purpose for piercing the corporate veil. The courts are also

willing to pierce the corporate veil with little, if any,

hesitation where the corporation has been used to defraud

third parties. A person who lies, or misrepresents an

important fact, to another person in order to get that person

to do business with the corporation will be liable to that

person. Responsibility for corporate fraud may be based not

only on active personal involvement in the fraud, but on the

actions of agents or on approval or ratification of the fraud.

In trying to determine whether or not to pierce a corporate

veil in order to prevent fraud or

injustice, a court will look at the following factors, which

are not acts of fraud in themselves but which may be seen as

evidence of fraud:

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Grossly Inadequate Capitalization:Where the assets put into the corporation is very small in

relation to the nature of the business of the corporation and

the risks of that business. Capitalization is generally

determined as of the time of incorporation; however, in some

circumstances courts have allowed subsequent loans to the

corporation to cure an initial lack of adequate capital.

Insolvency: Was the corporation insolvent when a debt or contractual

obligation was incurred? A corporation is insolvent if it is

unable to pay debts as they come due in the ordinary course of

business. It may also be insolvent if it has considerably more

liabilities than assets.

Diversion of Funds: Have shareholders taken corporate funds and used them for

personal purposes? Reimbursement of expenses to shareholders,

officers or directors on behalf of the corporation does not

constitute diversion.

Disregard of Corporate Formalities: It is important to observe corporate formalities –

1. to conduct business as an officer of the corporation,

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2. to deal with third parties through the corporation,

3. to hold annual meetings,

4. to keep corporate records, etc.

However, failure to observe corporate formalities alone will

not typically support an effort to pierce the corporate veil.

It may be used as evidence, however, of a lack of difference

between the owner and the corporation.

Disregard of the Corporate Entity: The corporate veil may be pierced where the owner of a

corporation and the corporation itself cannot be

distinguished. Is the corporation merely a shell, an alter ego

(“other self”) of the owner? Did the corporation operate

solely based on cash infusions from the owner? Does it serve

no business purpose separate from the owner? Was it insolvent

when the debts to owners were taken into account? Are the

corporation’s interests one-in-the-same with the owner? Was

the corporation used merely to serve the interests of the

owner to the detriment of the corporation’s creditors?

Courts typically will not pierce the corporate veil of closely

held corporations simply because a business has failed and

people are left holding unpaid claims. Piercing the veil for a

mere

commercial reason flies in the face of the purpose of limited

liability – it seeks to hold the

owners, directors or officers liable to third parties for

their damages for doing business with the corporation.

In general, in order to pierce the veil, a court must find in

analyzing the five factors that creditors have been defrauded,

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or that the corporation has been used to commit an injustice

against the creditors. As previously stated, the ease or

difficulty of piercing the corporate veil depends on the

purpose for which the piercing is sought. The person who seeks

to pierce the corporate veil has the burden of proving that

there is a justification for doing so, and the mere fact that

the corporation has not paid its debt is not enough to meet

that burden.

LIFTING OF THE VEIL IN U.K.The corporate veil in UK company law is pierced very rarely.

After a series of attempts by the Court of Appeal during the

late 1960s and early 1970s to establish a theory of economic

reality, and a doctrine of control for lifting the veil, the

House of Lords reasserted an orthodox approach.

On a strict reading of the most prominent recent case, Adams v

Cape Industries plc3, the only true "veil piercing" may take place

when a company is set up for fraudulent purposes, or where it

is established to avoid an existing obligation. The veil is

also often ignored in the process of interpreting a

statute, and as a matter of tort law it is open as a matter of

authority that a direct duty of care may be owed by the

managers of a parent company to accident victims of a

3 [1990] Ch 43323 | P a g e

subsidiary. There are also significant statements still among

the judiciary in support of a broader veil lifting approach in

the interests of "justice".

It is an axiomatic principle of English company law that a

company is an entity separate and distinct from its members,

who are liable only to the extent that they have contributed

to the company's capital: Salomon v Salomon. The effect of this

rule is that the individual subsidiaries within a conglomerate

will be treated as separate entities and the parent cannot be

made liable for the subsidiaries debts on insolvency.

Furthermore, it can create subsidiaries with inadequate

capitalisation and secure loans to the subsidiaries with fixed

charges over their assets, despite the fact that this is "not

necessarily the most honest way of trading".

Although the secondary literature refers to different means of

"lifting" or "piercing" the veil (see Ottolenghi (1959)),

judicial dicta supporting the view that the rule in Salomon is

subject to exceptions are thin on the ground. Lord Denning

MR outlined the theory of the "single economic unit" - wherein the court

examined the overall business operation as an economic unit, rather than strict legal

form - in DHN Food Distributors v Tower Hamlets4. 

However this has largely been repudiated and has been treated

with caution in subsequent judgments. In Woolfson v Strathclyde

BC5, the House of Lords held that it was a decision to be

confined to its facts (the question in DHN had been whether

the subsidiary of the plaintiff, the former owning the

premises on which the parent carried out its business, could

4 (1976)5 ibid

24 | P a g e

receive compensation for loss of business under a compulsory

purchase order notwithstanding that under the rule in Salomon,

it was the parent and not the subsidiary that had lost the

business). Likewise, in Bank of Tokyo v Karoon6, Lord Goff, who

had concurred in the result in DHN, held that the legal conception of

the corporate structure was entirely distinct from the economic realities.

The "single economic unit" theory was likewise rejected by the

CA in Adams v Cape Industries, 7where Slade LJ held that cases

where the rule in Salomon had been circumvented were merely

instances where they didn't know what to do.

The view expressed at first instance by HHJ Southwell QC

in Creasey v Breachwood 8that English law "definitely" recognised

the principle that the corporate veil could be lifted was

described as a heresy by Hobhouse LJ in Ord v Bellhaven9, and

these doubts were shared by Moritt V-C in Trustor v Smallbone (No

210): the corporate veil cannot be lifted merely because justice requires it. Despite

the rejection of the "justice of the case" test, it is observed from judicial reasoning in

veil piercing cases that the courts employ "equitable discretion" guided by general

principles such as male fides to test whether the corporate structure has been used

as a mere device.

The cases of Jones v Lipman11, where a company was used as

a "façade"(per Russell J.) to defraud the creditors of the

defendant and Gilford Motor Co Ltd v Horne12, where an injunction

was granted against a trader setting up a business which was

6 [1987] (PC)7 [1990] Ch 4338 [1992]9 [1998]10 [2001]11 [1962]12 [1933]25 | P a g e

merely as a vehicle allowing him to circumvent a covenant in

restraint of trade are often said to create a "fraud"

exception to the separate corporate personality.

Similarly, in Gencor v Dalby13, the tentative suggestion was made

that the corporate veil was being lifted where the company was

the "alter ego" of the defendant.

In truth, as Lord Cooke (1997) has noted extra judicially, it is

because of the separate identity of the company concerned and not despite it that

equity intervened in all of these cases. They are not instances of the corporate veil

being pierced but instead involve the application of other rules of law.

LIFTING OF THE VEIL IN U.S.A.

In the United States, corporate veil piercing is the most

litigated issue in corporate law. Although courts are

reluctant to hold a director or active shareholder liable for

actions that are legally the responsibility of the

corporation, even if the corporation has a single shareholder,

they will often do so if the corporation was markedly

noncompliant, or if holding only the corporation liable would

be singularly unfair to the plaintiff. In most jurisdictions,

no bright-line rule exists and the ruling is based on common

law precedents. In the US, different theories, most important

"alter ego" or "instrumentality rule", attempted to create a

piercing standard. Mostly, they rest upon three basic prongs - namely "unity

of interest and ownership", "wrongful conduct" and "proximate cause". However,13 [2000]26 | P a g e

the theories failed to articulate a real-world approach which

courts could directly apply to their cases. Thus, courts struggle

with the proof of each prong and rather analyze all given factors. This is known as

"totality of circumstances".

There is also the matter of what jurisdiction the corporation

is incorporated in if the corporation is authorized to do

business in more than one state. All corporations have one

specific state (their "home" state) to which they are

incorporated as a "domestic" corporation, and if they operate

in other states, they would apply for authority to do business

in those other states as a "foreign" corporation. In

determining whether or not the corporate veil may be pierced,

the courts are required to use the laws of the corporation's

home state. This issue can be significant, for example, the

rules for allowing a corporate veil to be pierced are much

more liberal in California than they are in Nevada, thus, the

owner(s) of a corporation operating in California would be

subject to different potential for the corporation's veil to

be pierced if the corporation was to be sued, depending on

whether the corporation was a California domestic corporation

or was a Nevada foreign corporation operating in California.

Generally, the plaintiff has to prove that the incorporation

was merely a formality and that the corporation neglected

corporate formalities and protocols, such as voting to approve

major corporate actions in the context of a duly authorized

corporate meeting. This is quite often the case when a

corporation facing legal liability transfers its assets and

business to another corporation with the same management and

27 | P a g e

shareholders. It also happens with single person corporations

that are managed in a haphazard manner. As such, the veil can be

pierced in both civil cases and where regulatory proceedings are taken against a

shell corporation.

LIFTING OF THE VEIL IN INDIA

The law laid down in Soloman v. Soloman and Co. is often

considered the source on the basis of which the jurisprudence

of corporate personality has been written world over. However,

the history of corporate-commercial litigation has witnessed

situations wherein the Courts have gone beyond the corporate

cloak and analyzed the working and the motives of the members

or directors of the company: In doing the same, the Courts

have evolved the concept of lifting or piercing the corporate

veil.

In recent times the plague of tax evasion has been so severe

that the Courts have actively used the doctrine of piercing of

corporate veil to probe into transactions and decide the

actual entities responsible behind the facade of the company.

Lately, the Hon’ble Karnataka High Court in the case of Richter

Holding v. The Assistant Director of Income Tax14 used this doctrine to

take the view that it may be necessary for the fact finding

authority to lift the corporate veil to look into the real

nature of the transaction and ascertain the virtual facts. The

Hon’ble High Court further held that the Assessee, as a

14 Writ Petition No. 7716/2011 decided on 24.03.201128 | P a g e

majority share holder, enjoys the power by way of interest and

capital gains in the assets of the company and it is necessary

to identify whether the transfer of shares includes indirect

transfer of assets and interest in the company.

In view of the aforementioned rulings, it is eminently clear

that the Indian Courts are actively pursuing this doctrine to

ascertain the actual offenders and the nature of transactions

behind the veil of the company. In Juggilal Kamlapat v. Commissioner

of Income Tax, Uttar Pradesh15 the Hon’ble Supreme Court had taken

the view that the doctrine of lifting the corporate veil ought

to be applied only in exceptional circumstances and not as a

routine matter. However, if the intention of the assessee is

to avoid tax through a collusive device, and the real purpose

was something else than what appeared on the face, then the

Court may lift the veil of corporate entity to pay due regard

to the economic realities behind the legal facade.

In Spencer & co. Ltd., Madras v The Commissioner of Wealth Tax16 a

Division Bench of Madras High Court held: It is well settled that an

incorporated company is a legal person and it cannot be equated to its

shareholders. The position continues to be the same even if the number of the share-

holders is reduced to one by accident or otherwise. The act of the company

cannot, therefore, be regarded as that of any of the share-

holder and vice-versa. It is true that occasionally the

corporate veil of a company is pierced through in order to

15 AIR 1969 SC 93216 AIR 1969 Mad 35929 | P a g e

find out the substance but that is only where it is permitted

by a statute or in exceptional cases of fraud.

In Workmen, Associated Rubber Industry Ltd. v Associated Industry Ltd17,

the apex Court was dealing with a case arising under Payment

of Bonus Act, 1965. Dealing with the facts of the case

presented, the apex Court observed: A new company is created wholly

owned by the principal company, with no assets of its own except those transferred

to it by the principal company, with no business or income of its own except

receiving dividends from shares transferred to it by the principal company and

serving no purpose whatsoever except to reduce the gross profits of the principal

company. These facts speak for themselves. There cannot be direct evidence that the

second company was formed as a device to reduce the gross profits of the Principal

company for whatever purpose. An obvious purpose that is served and which stares

one in the fact is to reduce the amount to be paid by way of bonus to workmen. It is

such an obvious device that no further evidence, direct or circumstantial, is

necessary.

In L.I.C v Escorts Ltd18 it was held: Generally and broadly speaking, we may

say that 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

statute or a beneficent statute is sought to be evaded or where associated

companies are inextricably connected as to be, in reality, part of one concern. It is

neither necessary nor desirable to enumerate the classes of cases where lifting the

veil is permissible, since, that must necessarily depend on the relevant statutory or

other provisions, the object sought to be achieved, the impugned conduct, the

involvement of the element of the public interest, the effect on parties who may be

affected etc.

17 [1986]157 ITR 77 (SC)18 1986 AIR SC 137030 | P a g e

In State of U.P. v Renusagar Power Co.19, the Supreme Court considered

the scope of the doctrine. It was contended that the Court can

disregard separate legal entity of the company only where the

company or firm have legal obligations. and lay down as under:

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. Whenever felt necessary, the State or the Board have

themselves lifted the corporate veil and have treated

Renusagar and Hindalco as one concern, and the generation in

Renusagar as the own source of generation of Hindalco. In

the impugned order, the profits of Renusagar have been treated

as the profits of Hindalco.

In Hackbridge- Hewittic & Easun Ltd. v G.E.C. Distribution Transformers20 a

Division Bench of Madras High Court considered the question of

lifting the veil and it was observed. Indeed, what has come to stay

as an organic theory, under which the doctrine has departed from the orthodox

approach extending the rule of piercing the veil to know the true character of a

person, has in essence made it almost obligatory to make a closer examination as to

whether the principal and subsidiary like principal and agent exist for each other or

as one mind thus as organs of each other. It is often said that a corporation is an

abstraction. It has no mind of its own any more than it has a body of its own. Its

active and directing will must consequently be3 sought in the person of somebody

who for some purposes may be called an agent, but who is really the directing mind

and will of the corporation, the very ego and centre of the personality of the

corporation. The orthodox approach that a company is a legal entity in itself and,

19 1988 AIR SC 173720 1990 Indlaw MAD 27131 | P a g e

thus, whether it is a subsidiary of another or not, is of no meaning or consequence

for fixing the responsibility of the activities of one upon another. Thus, on the

principle aforementioned, the fact that the subsidiary company has a distinct legal

personality does not suffice to dispose of the possibility that its behaviour might be

imputed to the parent company. Such maybe the case in particular when the

subsidiary, although, being a distinct legal personality, does not determine its

behaviour on the market in autonomous manner but essentially carries out the

instructions given to it by the parent company. When the subsidiary does not enjoy

any real autonomy in the determination of its course of action on the market, it is

possible to say that it has no personality of its own and that it has one and the same

as the parent company.

In U.K. Mehra v Union of India21 a Division Bench of Delhi High Court

observed that where a subsidiary is wholly owned by the principal company

which has a pervasive control over it and the former acts as the hand and voice of

the latter, the subsidiary would be nothing but an instrumentality of the principal

company, and wherever public interest demands, the Court must lift the corporate

veil in the interest of justice.

In New Horizons Ltd. v Union of India22 the Supreme Court considered the

doctrine of lifting the corporate veil in the context of award of contract by the State.

It was held that if a joint venture is formed by two different companies with

substantial capital participation the experience of one of them can be treated as

experience of joint venture company for the purpose of prequalification

responsiveness.

21 AIR 1994 Del 2522 1995 SCC (1) 47832 | P a g e

RECENT TREND: CONCLUSIONThe doctrine seems to be in vogue! As ‘Scams’ is the new word

on the block, whether it be Satyam’s Ramalinga Raju or the

band wagon locked in Tihar Jail for the 2G Scam, it is the

application of the niceties of the doctrine that has revealed

the true culprit behind the actions of the company. The aim of

the doctrine is to ensure that the players behind the

corporate veil maintain the sanctity of the company’s affairs

and do not malign the same by injecting personal motive.

Nevertheless, a situation may warrant that the legal identity

33 | P a g e

of the company as a juristic person be seen in distinguished

with the identity of the person causing the tax evasion,

fraud, etc.

Take the example of loss caused to a company by embezzlement,

something engineered and tailored on the lines of the Satyam

case, where a Managing Director (or an agent/employee) of a

company, along with his confidants occupying top positions,

are involved in defrauding a company of its funds and business

opportunities. The Courts in this regard have opined that the

loss be allowed as a deduction under the provisions of the

Income Tax Act, 1961. The relevance of the example in terms of

the present article is to give the doctrine of corporate veil

a new facet.

In the case of Badridas Daga v. CIT23, the Hon’ble Supreme Court

held that a loss caused by embezzlement is allowable as a deduction where it is

shown that the loss has occurred in the course of the business and is incidental to it.

Another pre-condition to be established is that the ‘company’ has to be unaware of

the embezzlement.

Further, through a plethora of decisions delivered after

Badridas Daga (supra), additions conditions like a reasonable

chance of restitution, year of allowance, etc. have been laid

down.

The above view contemplates the distinction of the identity of

the company from the person who has caused the fraud. Thus,

even though the doctrine of corporate veil is applied, the

separate identity of the company from its directors is not

totally discarded. On the contrary, this identity is

reinforced. 23 [1958] 34 ITR 10 (SC)34 | P a g e

In such cases, the knowledge of the director causing the fraud

is deemed to be distinct from the knowledge of the company.

The Courts will prosecute the director of the company along

with his confidants and not penalize the company as a whole.

The onus in such cases therefore lies on the company to prove

the absence of knowledge of the embezzlement. Though the

determination of knowledge will depend on a case to case

analysis, but where the company fails to do so, like in the

case of Curtis v. J. & G. Oldfield Limited24 and Plas-Flab Pvt. Ltd. v.

Commissioner of Income Tax25, the loss is not allowed as a deduction.

Nevertheless, the legal principle with regard to the application of the doctrine is

reinforced by declaring the company as a separate juristic person and the director

as another.

The facets of the doctrine of corporate veil stated

hereinabove are only an illustrative list of the non-

exhaustive interpretation accorded by judicial precedents. As

stated, the principle is ever expansive and is applied as per

the facts and circumstances of each case. However, in sum and

substance, the application of the doctrine will revolve

around, the facts of each case, the identity of the company

and the identity of the person(s) actually involved in the

misdoings.

Even in taxation cases, there may be cases where the identity

of a company may be disregarded to identify the real culprit,

24 [1925] 9 Tax Cas. 31925 [1994] 208 ITR 154 35 | P a g e

whereas on the other hand, there may be cases where the

identity of the company will be reinforced to allow the

separation of the knowledge of the person causing the fraud

with the knowledge of the company.

BIBLIOGRAPHY

http://en.wikipedia.org/wiki/Piercing_the_corporate_veil

http://www.businessdictionary.com/definition/corporate-veil.html

http://indiacorplaw.blogspot.com/2008/11/grounds-for-lifting-corporate-

veil.html

http://www.legalserviceindia.com/articles/corporate.htm

http://biztaxlaw.about.com/od/glossaryc/g/corpshield.htm

36 | P a g e

http://biztaxlaw.about.com/od/glossaryp/g/piercecorpveil.htm

http://legal-dictionary.thefreedictionary.com/Piercing+the+Corporate+Veil

http://www.wikicfo.com/wiki/Corporate-Veil.ashx

http://definitions.uslegal.com/p/piercing-the-corporate-veil/

http://www.bcasonline.org/articles/artin.asp?52

http://indiacorplaw.blogspot.com/2008/10/british-decision-on-lifting-

corporate.html

http://statutelaw.blogspot.com/2011/04/41-supreme-court-of-india-lifting-

of.html

http://www.business-standard.com/india/news/m-j-antony-

%60liftingcorporate-veil%60/160711/

http://lawofassociation.blogspot.com/2011/06/lifting-corporate-veil-general-

trend.html

37 | P a g e