LIFTING OF CORPORATE VEIL
Meaning It may happen that the corporate personality of the company is used to commit frauds or improper or illegal acts.
Since an artificial person is not capable of doing anything illegal or fraudulent, the facade of corporate personality
might have to be removed to identify the persons who are really guilty. This is known as lifting the corporate veil'.
A. UNDER STATUTORY PROVISION
1. Misstatement in personal liability of every sec 34- punishable u/s 447
prospectus director, promoter, expert and
[sec 34 & 35] every other person, who
authorised such issue of
fraud of ≥10 lac or 1% of turnover imprisonment of 6
prospectus to investor who
of company whichever is lower & months to 10 year &
bought shares on faith of such
not involving public interest
prospectus
Fine not less than the
amount of fraud but
which may extend to
three times the amount
if public interest is involved imprisonment not less
than 3 year
<10 lac or 1% of turnover of the imprisonment upto 5 yr
company whichever is lower or fine upto 50 lac or
both
However, a person may escape the aforesaid conviction if he proves that such statement or omission
was immaterial or that he had reasonable grounds to believe, and did up to the time of issue of the
prospectus believe that the statement was true or the inclusion or omission was necessary.
2. Failure to ● if minimum subscription has not been received within 30 days of the issue of prospectus or
return such other period as may be specified by the SEBI,
application
money [sec ● the application money shall be repaid within a period of 15 days from the closure of the
39] issue and
● if any such money is not so repaid within such period, the directors of the company who are
officers in default shall jointly and severally be liable to
● repay that money with ● punishable with a fine of
interest at the rate of ₹1000 for each day of
15% p.a & default or ₹1,00,000
whichever is less. .
3. Misdescription As per section 12, a company shall have its name printed on hundies, promissory notes, bills of
of name [sec exchange and such other documents as may be prescribed.
12]
where an officer of a company signs on behalf of the company any contract, bill of exchange, hundi,
promissory note cheque or order for money, such person shall be personally liable to the holder if the
name of the company is either not mentioned, or is not properly mentioned
Hendon v. Adelman (1973)
Accordingly, where on a cheque, the name of a company was stated as 'LR agencies limited' whereas
the real name of the company was L&R Agencies Ltd. the signatory directors were held personally liable
Besides, the company and its officer who is in default shall be liable to a penalty ₹1,000 for each
day during which such default continues or ₹1,00,000, whichever is less.
4. Punishment for Failure to return deposit or interest thereon within specified time period,
contravention company shall be Every officer of the company who is in default officers of the company who
of sec 73 or sec punishable with a shall be punishable with imprisonment which are knowingly at default shall
76 fine 1 crore - 10 may extend to 7 years or with fine which shall also be liable under sec 447.
crore not be less than ₹25 lac but which may extend
to ₹ 2 crore, or with both.
5. Fraudulent Where in the case of winding-up of a company it appears that any business of the company has been
conduct of carried on with intent to defraud creditors of the company or any other person, or for any fraudulent
business [sec purpose, those who are knowingly parties to such conduct of business may, if the Tribunal thinks it
339] proper to do so, be made personally liable without any limitation as to liability for all or any debts or
other liabilities of the company.
Re. Augustus Barnett & Sons Ltd. [1986]
Liability under this section 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
6. Liability for Directors and other officers of a company will be personally liable for all those acts which they have
ultra vires act done on behalf of a company if the same are ultra vires the company.
7. Holding & The court on facts of a case may refuse to grant independent status to subsidiary company e.g. Profits
Subsidiary of Subsidiary being treated as those of parent company, the control and conduct of business of
company subsidiary company resting completely in the nominee of holding company.
8. Membership every person who is a member of the company shall be severally liable for the debts of the company.
falling below
statutory
minimum u/s
3A
9. For the Central Government may appoint one or more inspectors to investigate and report on the
investigation of membership of any company for the purpose of determining the true persons who are financially
ownership of interested in the company and who control its policy or materially influence it.
company u/s
216
10. For facilitating the task of an inspector appointed under
sec 210 investigation into affairs of the company
sec 212 investigation by CG into affairs of company by Serious Fraud Investigation Officer
sec 213 investigation into affairs of company an application by tribunal
11. Liability under under the Income-tax Act, where any private company is wound-up and if tax arrears of the company in
other statutes respect of any income of any previous year cannot be recovered, every person who was director of that
company at any time during the relevant previous year shall be jointly and severally liable for payment of
tax.
B. UNDER JUDICIAL INTERPRETATION
1. Protection of court will ignore separate entity if it is formed solely for the purpose of evading taxes.
revenue
Sir Dinshaw Maneckjee Petit, Re AIR 1927
The assessee was a millionaire earning huge income by way of dividend and interest.He formed four
private companies and transferred his investments to each of these companies in exchange of their
shares. The dividends and interest income received by the company was handed back to Sir Dinshaw
as a pretended loan. It was held that the company was formed by the assessee purely and simply as a
means of avoiding tax and company was nothing more than assessee himself. It did no business, but
was created simply as a legal entity to ostensibly receive the dividends and interest and to hand them
over to the assessee as pretended loans.
2. Prevention of where the company has been formed to defeat or circumvent a law, defraud creditors or to avoid legal
fraud or obligation.
improper
conduct Gilford Motor Company v. Horne[1933]
Horne' had been employed by the company under an agreement that he shall not solicit the customers
of the company or compete with it for a certain period of time after leaving its employment. After ceasing
to be employed by the plaintiff, Horne formed a company which carried on a competing business and
caused the whole of its shares to be allotted to his wife and an employee of the company, who were
appointed to be its directors. It was held that since the defendant (Horne) in fact controlled the company,
its formation was a mere 'cloak or sham' to enable him to break his agreement with the plaintiff.
Accordingly, an injunction was issued against him and against the company he had formed restraining
them from soliciting the plaintiff's customers
3. Determination Daimler Company Ltd v. Continental Tyre & Rubber Co. (Great Britain) [1916]
of the enemy
character of a ● A company was incorporated in London for the purpose of selling tyres manufactured in
company Germany by a German company. Its majority shareholders and all the directors were Germans.
● On declaration of war between England and Germany in 1914, it was held that since both the
decision-making bodies, the Board of directors and the general body of shareholders were
controlled by Germans, the company was a German company and hence, an enemy company.
● Accordingly, the suit filed by the company to recover a trade debt was dismissed on the ground
that such payment would amount to trading with enemy.
4. Formation of Merchandise Transport Limited v. British Transport Commission [1982]
subsidiaries to
act as agent ● A transport company wanted to obtain licences for its vehicles, but it could not do so if it made
the application in its own name.
● It, therefore, formed a subsidiary company and the application for licences was made in the
name of the subsidiary.
● The vehicles were to be transferred to the subsidiary.
● Held, the parent and the subsidiary company were one commercial unit and the application for
licences was rejected.
5. Where a Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd.[1986]
company is
used to avoid ● A limited' had purchased shares of 'B limited' by investing a sum of Rs. 4,50,000. It was getting
welfare annual dividends in respect of these shares and the amount so received was shown in the profit
legislation and loss account of the company year after year. It was taken into account for the purpose of
calculating the bonus payable to workmen of the company.
● Sometime in the course of the year 1968, the company transferred the shares of B limited, held
by it to 'C limited', a subsidiary company wholly owned by it. 'C limited' had no other capital
except the shares of B limited' transferred to it by the 'A limited'. It had no other business or
source of income whatsoever except receiving the dividend on the shares of B limited.
● The dividend income from these shares of B limited' was not transferred to the 'A limited' and,
therefore, it did not find place in the profit and loss account of the company with the result that
available surplus for the purposes of payment of bonus to the workmen of the company got
reduced.
The Supreme Court, however, held that it was true that in law 'A limited' and 'C limited' were distinct
legal entities having separate existence, but, that was not an end of the matter. Here the new company
was created as 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 served no purpose whatsoever
except to reduce the gross profits of the principal company.
The amount of dividend received by C limited' was, therefore, to be taken into account in computing
profits of 'A Ltd' available for bonus.
6. Where a PNB Finance Limited v. Shital Prasad Jain [1983]
company is
used for some Pursuant to a request made by 'S', the financial advisor of a financing public limited company, granted a
illegal or loan of Rs. 50 lakhs to 'S' on his representation that he would utilise the said amount for the purchase of
improper use immovable property in Delhi and the directors of the plaintiff company sanctioned the loan, inter alia, on
the condition that the loan would be secured by deposit of the title deeds of the property. A promissory
note with regard to the same was also executed by 'S'. However, 'S' did not pay anything either towards
the principal amount or towards interest. Instead, he diverted the amount of the loan to three public
limited companies floated by him and his son. These companies, in turn, applied the amount of loans so
diverted in purchasing immovable properties at New Delhi. The question that arose was whether the
defendants (S' his son and the three public limited companies) could be restrained from alienating the
properties purchased. The court granted relief to the plaintiff by restraining the defendants from any
alienation, transfer, disposal or encumbering of the properties in question.
7. For New Horizons Ltd. v. Union of India' [1995]
determination
of technical ● The Department of Telecommunications, Hyderabad invited sealed tenders of printing, binding
competence of and supply of telephone directories; the stipulation being tenderer should have had experience in
the company supplying such directories to telephone systems with capacity to more than 50,000 lines.
● The appellant New Horizons Ltd. (NHL), a joint-venture company, and the Respondent No. 4 and
others submitted their tenders, which were considered by the Tender Evaluation Committee. The
offer of Respondent No. 4 was accepted.
● NHL challenged the decision in the High Court stating that its offer could not be rejected on the
hyper-technical plea that NHL itself had no experience. NHL pleaded that its both Indian and
the foreign collaborators had experience in the related field.
● The Supreme Court held that lifting of the corporate veil was necessary and for the purpose of
considering whether NHL had the requisite experience as contemplated in the tender document,
the experience of the constituents of the NHL had also to be taken into consideration. The
said experience of NHL had been ignored by Evaluation Committee on an erroneous view.
Piercing through the veil covering NHL the Court revealed that both the groups of joint
venture had contributed towards the resources of the venture in the form of machines,
equipment and expertise. Thus, in respect of such a joint venture company, the
experience of the company would include the experience of the constituents of the joint
venture as well. The Supreme Court held that the Tender Evaluation Committee's refusal to
consider the tender of NHL and the consequent acceptance of the tender of Respondent No. 4
suffered from the vice of arbitrariness and irrationality.
