JAMIA MILLIA ISLAMIA

LIFTING OF CORPORATE VEIL

SUBMITTED TO: QAZI USMAAN SIR

Faculty of Law

SUBMITTED BY: HUMANYU KABEER

B.A. LL.B. (Hons.)

Semester VI (Self-Finance)
1. INTRODUCTION

Incorporation by registration was introduced in 1844 and the doctrine of limited liability
followed in 1855.Subsequently 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.

What this means is that the company has life of its own, can own property, can sue and be sued
in its own name, has perpetual life and existence to name a few of the benefits of incorporation.
It is a trite law that a rather hefty veil is drawn between these two that can be lifted only in a
limited number of circumstances that seem to be fluctuating according to current judicial
thinking.

However, the courts have not always applied the principal laid down in Solomon v. Solomon &
Co. In a number of circumstances, the court will pierce the corporate veil or will ignore the
corporate veil to reach the person behind the veil or reveal the true form and character of the
concerned company. The rationale behind this is probably that the law will not allow the
corporate form to be misused or for the purposes which is set out in the statute. In those
circumstances in which the court feels that the corporate forms are being misused, it will rip
through the corporate veil and expose its true character and nature disregarding the Solomon
principle as laid down by the house of lords.

When the veil can be lifted?

A. Fraud

1
[1897] AC 22
 Courts have been more that prepared to pierce the corporate veil when it fells that fraud is
or could be perpetrated behind the veil. The courts will not allow the Solomon principal
to be used as an engine of fraud. The two classic cases of the fraud exception are Gilford
motor company ltd. v. Home2 and Jones v. Lipman3. In the first case, 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 Court of appeal was of the view that “the
company was formed as a device, a stratagem, in order to mask the effective carrying on
of business of Mr. Horne, in this case it was clear that the main purpose of incorporating
the new company was to perpetrate fraud.” Thus, the court of appeal regarded it as a mere
shame to cloak his wrongdoings. In the second case of 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. Russell J. specifically referred to
the judgments in Gilford v. Horne and held that the company here was “a mask which
(Mr. Lipman) holds before his face in an attempt to avoid recognition by the eye of
equity”, he awarded specific performance both against Mr. Lipman and the company.
Under no circumstances will the court allow the ant form of abuse of the corporate form
and when such abuse occurs the courts will step in and Jennifer Payne4 in her article
lists three aspects of fraud, which needs to be looked at before the corporate veil can be
lifted which are:

I) what are the motives of the fraudulent person relevant-

Whether some level of deception necessarily needs to be determined. In the case of

2
[1933] Ch. 935,
3
[1962] 1 WLR 832
4
http://www.geocities.com/Athens/Aegean/7023/, accessed on April 20, 2020.
the other party?” The issue came up for discussion in the case of Adams v.Cape industries plc.5
In considering whether the corporate form has been used in such a way as to justify the lifting of
the corporate veil, the court stated that the correct test in relation to groups of companies was
whether the company had been used as a “mere façade concealing the true facts” applying this
test Slade J. said that the “motives of the perpetrator may be highly material”, in both the classic
cases intention to deceive the plaintiff was very much present however it was not so in Adams
v.Cape industries. So the point that needs to be determined is whether motive is necessary for
the fraud exemption to exist. However to get any answer it is also important to find out the
nature of legal right that is being denied to the plaintiff.

II) Is the character of the legal obligation being evaded relevant?

What the court wants is to prevent limited companies from using the corporate form to
evade a contractual or legal obligation. However one needs to question whether the nature of this
obligation will affect the ability of the court to lift the corporate veil. In the classic cases the
defendants sought to avoid the legal obligations that existed prior to their incorporation, the main
motive of incorporation was to avoid the performance of the legal obligation in Adams v. Cape
there was some discussion about the need to allow the veil to be lifted in order to prevent Cape
avoiding publicity as to its involvement in the sale of asbestos to America and to prevent cape
from having any practical benefit of the group's asbestos trade in the states without the attendant
risks of tortuous liability. However, the tortuous liability was purely speculative. For the fraud
exception to exist the defendant must deny the plaintiff some preexisting legal right. In case no
legal right is existent the intention on part of the defendant to deceive the plaintiff must be
speculative and hence less substantial in nature. If the legal right crystallizes before the
incorporation of the company then the mental element is satisfied if however, the reverse then
question arises if whether in such circumstances the mental element can be satisfied. A suitable
answer to this is if the legal right crystallizes after the incorporation but before the use of the
corporate form to evade the legal right, the fraud exception should be satisfied.

III) Is the timing of the incorporation of the device company relevant?

5
[1990] Ch 433
 In Creasey v. Breachwood Motors Limited,6 the reason for the failure of the fraud
exception was the timing of incorporation of the sham company. Here Mr. Creasey brought an
action against wrongful dismissal against his employers BW. BW served a defense but four
months later he was served a notice saying that the company was insolvent .BM took over all the
business except the plaintiff's claim. The plaintiff obtained an order for damages and interest
however before he received anything BW went was dissolved without going into liquidation. The
plaintiff sought an order substituting BM for BW on the grounds of justice. In this case the facts
may look similar to Adams v. Cape Industries however Richard Southwell sitting as
distinguished Gilford and Horne and Jones v. Lipman on the basis that in those cases the sham
companies are had been formed with the view to carry out the fraud .in the present case the
device company BM was already in business and caring on its own business. This a very
controversial case and should have been decided on the basis of the classic cases as it should not
matter whether device companies were created to avoid the legal obligation or whether they were
in existence. Creasey should have been otherwise decided maybe on the grounds of justice.

2. Group Enterprises

Sometimes in the case of group of enterprises the Solomon principal may not be adhered
to and the court may lift the veil in order to look at the economic realities of the group itself. In
the case of D. H. N. Food products Ltd. v. Tower Hamlets 7 it has been said that the courts may
disregard Solomon's case whenever it is just and equitable to do so. In the above-mentioned case
the court of appeal thought that the present case where it was one suitable for lifting the
corporate veil. Here the three subsidiary companies were treated as a part of the same economic
entity or group and were entitled to compensation. Lord Denning, has remarked that “we know
that in many respects a group of companies are treated together for the purpose of accounts,
balance sheet, and profit and loss accounts.” Gower too in his book says, “There is evidence of a
general tendency to ignore the separate legal group”, however whether the court will pierce the
corporate veil depends on the facts of the case. The nature of shareholding and control would be

6
[ 1993] BCLC 480
7
[1976] 3 All ER 462
indicators whether the court would pierce the corporate veil. In the case of Wolfson the house of
lords held that there was “no basis consonant with the principle upon which on the facts of this
case the corporate veil can be pierced to the effect of holding Wolfson to be the true owner of
Campbell's business or the assets of solfred”, “the two subsidiary companies that were jointly
claiming compensation for the value of the land and disturbance of business.” The House of
Lords in the above-mentioned case had remarked “properly applied the principle that it is
appropriate to pierce the corporate veil only where special circumstances exist indicating that it
is a mere façade concealing the true facts”. In the figurative sense façade denotes outward
appearance especially one that is false or deceptive and imports pretence and concealment. That
the corporator has complete control of the company is not enough to constitute the company as a
mere façade rather that term suggests in the context the deliberate concealment of the identity
and activities of the corporator.

The separate legal personality of the company, although a “technical point” is not matter of form
it is a matter of substance and reality and the corporator ought not, on every occasion, to be
relieved of the disadvantageous consequences of an arrangement voluntarily entered into by the
corporator for reasons considered by the corporator to be of advantage to him. In particular “the
group enterprise” concept must obviously be carefully limited so that companies who seek the
advantages of separate corporate personality must generally accept the corresponding burdens
and limitations. In some cases the corporate veil has not been lifted prime examples of that are
Adams V.Cape Industries. This was a case involving a foreign judgment against a company; the
court in this case held that each company in the group is a separate entity. However, one area
where the courts have been particularly reluctant to recognize the concept of group entity is with
relation with corporate debts. Though it is not possible to in absence of agency or trust to hold
one group liable for the debts of another in America equitable doctrines are applied and in New
Zealand as well as Ireland there are statutory provisions for pooling of assets.

3. Agency
In the case of Broderip v. Solomon8 Justice Vaughan Williams expressed that the company was
nothing but an agent of Solomon, “That this business was Mr. Solomon’s business and no one
else’s; that he chose to employ as agent a limited company; that he is bound to indemnify that
agent the company and that this agent, the company has lien on the assets…”, however on appeal
to the house of lords it was held that a company did not automatically become an agent of the
shareholder even if it was a one man company and the other shareholders were dummies.
A company having power to act as an agent may do so as an agent for its parent company or
indeed for all or any of the individual members if it or they authorize it to do so. If so the parent
company or the members will be bound by the acts of its agent so long as those acts are within
actual or apparent scope of the authority. But there is no presumption of any such relationship in
the absence of an express agreement between the parties it will be difficult to establish one. In
cape attempt to do so failed. In cases where the agency agreement holds good and the parties
concerned have expressly agreed to such a agreement them the corporate veil shall be lifted and
the principal shall be liable for the acts for the acts of the agent.

4. Trust

The courts may pierce the corporate veil to look at the characteristics of the shareholders. In the
case of Abbey and Planning the court lifted the corporate veil. In this case a school was run life a
company but the shares were held by trustees on educational charitable trusts. They pierced the
veil in order to look into the terms on which the trustee held the shares.

5. Tort

Usually the English courts have not lifted the veil on the ground of tort it is a phenomenon not
witnessed in most common law jurisdiction apart from Canada.

6. Enemy character

In times of war the court is prepared to lift the corporate veil and determine the nature of
shareholding as it did in the Daimler case where germen shareholders held the shares of an
English company during the time of world war.
8
(1895) 2 Ch. 322
7. Tax

At times tax legislations warrant the lifting of the corporate veil. The courts are prepared to
disregard the separate legal personality of companies in case of tax evasions or liberal schemes
of tax avoidance without any necessary legislative authority.

Statutory support of lifting the veil (English law)

1) Reduction of number of members

Under section 249 of the companies act if a public company carries on business for more than six
months may become liable jointly and severally with the company for the payment of debts the
right that this section confers on creditors is limited. It is only that member who remains after 6
months that can be sued. The anomaly of this section is that the liability attaches to a member
and not a director unless the director also happens to be a director as well. This section has very
little practical utility because of the limitation.

2) Fraudulent or wrongful trading:

a) Criminal liability:

If any business of a company is carried on with the intend to defraud creditors of the company or
creditors of any other person or for any fraudulent purpose who was knowingly a party to the
carrying on of the business in that manner is liable to imprisonment or fine or both.

9
24 (1) In the case of a company which was a private limited company immediately before the commencement of
this Act, the Registrar shall enter the word “Private” before the word “Limited” in the name of the company upon
the register and shall also make the necessary alterations in the certificate of incorporation issued to the company
and in its memorandum of association.

(2) Sub-section (3) of section 23 shall apply to a change of name under sub-section (1), as it applies to a change of
name under section 21.
This applies whether or not the company has been or is in the course of being wound up.
The civil liability for the same offence in now a part of the Insolvency Act

b) Section 213

(1) If in the course of winding up of a company it appears that any business of the company has
been carried on with the intend to defraud creditors of the company or creditors of any other
person or for any fraudulent purpose…then

(2) The court on application of the liquidator may declare that person in who were knowingly
parties to the carrying on of business in that manner are liable to make such contributions (if any)
as the court thinks proper.

Wrongful trading is dealt with in section 214 of the insolvency act and has similar provisions to
section 213. However this section operates only in cases of insolvent liquidation and the
declaration can be made only against a person who at some time before the commencement of
winding up, was a director of the company and knew or ought to have concluded at that time that
there was no reasonable prospect that the company would avoid going into liquidation.
No such declaration will take place is the court is satisfied that the person took all the possible
steps to minimize the losses.

These sections have been considered to be opposed to the Solomon principle: -

3) abuse off company names or employment of disqualified directors

Section 216 of the Insolvency Act now makes it an offence for anyone who was a director or a
shadow director of the original company at any time during the 12 months preceding its going
into insolvent liquidation to be in any way concerned (except with leave of court) during the next
five years in the formation, management, of a company or business with a name by which the
original company was known or one so similar as to suggest an association with that company.

A person acting in violation of section 216 is under section 217 personally liable, jointly and
severally with that company and any other person so liable, for the debts and other liabilities of
that company and any other person so liable, for the debts and liabilities of that company
incurred while he was concerned in its management and breach of section 216.

d) Misdescription of the company

Section 349(4) of the companies act provides that if any officer of the company or other person
acting on its behalf Signs or authorizes to be signed on behalf of the company any bill of
exchange, promissory note, endorsement, cheque or order for money or goods in which the
companies name is not mentioned in legible letters. He is liable to a fine and he is personally
liable to the holder of such as mentioned above.

e) Premature trading

Another example of personal liability is section 117 (8). Under this section a public limited
company newly incorporated as such must not "do business or exercise any borrowing power"
until it has obtained from the registrar of companies a certificate that has complied with the
provisions of the act relating to the raising of the prescribed share capital or until it has re-
registered as a private company. if it enters into any transaction contrary to this provision not
only are the company and its officers in default ,liable to pay fines but it the company fails to
comply with its obligations in that connection within 21 days of being called upon to do so, the
directors of the company are jointly and severally liable to indemnify the other party in respect of
any loss or damage suffered by reason of the company’s failure.

Conclusion:
The Judgment of the Court of Appeal in the Adams case is the current law, which is nothing
more than a reiteration of the law laid down by the House of Lords in Solomon's case. The
bottom line being only the court will lift the veil in the face of grave abuse of the corporate form
not otherwise. It’s evident from the above discourse that in this area that the courts are keen to
reaffirm the importance of the Salomon principle in company law and that the separate legal
personality of a company will not be disregarded with ease.
 BIBLIOGRAPHY

 BOOKS REFERRED
 Taxman, Companies Act, (Taxman Allied Services Pvt. Ltd., 10th edn.,2007)
 Avtar Singh, Companies Act, (Eastern Book Company, New Delhi, 14 th
Edn., 2005)
 WEBSITES

 www.westlaw.com

 www.manupatra.com

 www.legalserviceindia.com

 www.google.com

 www.tribuneindia.com

 www.wikipedia.org

 ARTICLES

Mr. Abhishek Holding <www.manupatra/articles/corporate/pop