Chapter 2

1. Doctrine of lifting of corporate veil. Discuss with reference to the decisions of the supreme court and high
court of India. What are conditions under which the corporate veil can be lifted.
Answer:
When a company is incorporated it possess its own legal personality or an independent status other than or
separate from its members. It means after incorporation members and company get separate from each other,
becomes two separate entities. This concept of separation is considered as corporate personality or corporate
veil.
There is a fictional veil that exists between the company and the shareholders. In reality company is dependent
on its members, directors, and partners for functioning. The corporate personality states that the member can
use this corporate personality for any legitimate purpose.
Many times, it is seen that these members commit illegal or improper acts behind this corporate personality
and misuses it to escape from the liability. Thus, it becomes important for the court to lift up the veil and see
who was responsible for the improper conduct. This is considered as lifting of the corporate veil.
This separate personality is a regulatory advantage, and it must be used for a lawful purpose only. Whenever
and wherever a fraudulent use is made of the legal establishment, the individuals will not be permitted to hide
behind the curtain of corporate personality.
The concerned authority will break this company’s shell and sue the individuals who have committed such an
offence.

This lifting of the curtain is called Lifting the Corporate veil under the Companies Act, 2013.
The corporate veil is a safeguard that protects the members from the company’s action. In Layman’s terms,
if a company violates any law or incurs any liability, the members cannot be held liable.
Thus, shareholders get protection from the act of the company. This lifting of the corporate veil is described
in the famous case of

The Salomon -vs- Salomon and Co Ltd.

That was a secured creditor and shareholder of the company. There were other unsecured creditors as well.
After a while, the company incurred losses and decided to wind up. During the winding up process, the
unsecured creditors claimed that they should be paid before Salomon (as a secured creditor) as it was his
company. The court stated in this case that after incorporation of a company the company and its members
are considered as two separate entities.
Meaning and Definition of Company

Company under section 2(20) means a company incorporated under the Companies Act, 2013 or under any
previous Companies Act. Company is generally a legal entity represented by a set of members or association
of people, with specific objectives. The line of business structure of the company can be corporation,
partnership, or proprietorship. These are the basic structure and types which decide the ownership of the
company.

According to Justice Marshall, “a company is an artificial person, has no physical existence. It is invisible and
intangible. It exists only in contemplation of law”.

According to Justice James, “a company is an Association of persons united for a common object”.
According to Justice Lindley, “a company is an association of persons, these persons contribute money or
money’s worth to common stock. The common stock so contributed is money is called Capital of the
company, the persons who contributed the capital are called as Members of the company. The capital is
employed in some trade or business, the members share the profits and losses arsing from such business. The
proportion of capital to which each member is entitled is called as his share, the shares are always transferable
although the right to transfer is often more or less restricted”.

A corporate veil is a legal concept that separates the acts done by the companies and organizations from the
actions of the shareholders. It protects the shareholders from being liable for the actions done by the company.
This is not an absolute right the court depending on the facts of the case can take the decision whether the
shareholder is liable or not.

According to the Cambridge Dictionary, “shareholders may hide behind the corporate veil, assured that their
liability does not extend beyond the value of their shares”.

GROUNDS FOR LIFTING THE VEIL

 FRAUD /IMPROPER CONDUCT:

If the corporate personality is used for executing a fraud or Improper Conduct.

In this type of scenarios, the court apply the principle of lifting up of the corporate veil.

Jones VS Lipman.
Lipman agrees to sell his property to Jones and enters into a contract but subsequently changes his mind. And
to escape from specific performances of the contract he sells the property to his own company. Jones on
claiming the property Lipman said that he was no longer the owner of the property.
The Court observed that to escape from Specific performances Lipman did so, the Court directed that its
mandatory for him to perform this contract.

 When the company is a mere cloak / shame. That the company itself is incorporated as to conduct
fraud or used as a mere cloak or shame.

Gliford motor Company Ltd. VS Horne.

Horne is an employee of the Gliford company. Gliford enters into a contract with Horne about separately not
solicitating with the customers. To escape from this condition, Horne opened his own company and started
approaching Gliford's customers. The court stated by applying the corporate veils principal the company was
incorporated to do unlawful activities. So, the court stated injunction on both Horne and his company and
stated this act is invalid.

 When a company is used for evasion of tax

When or principal company incorporate various new companies for its evasion of tax, the sole intention is to
distribute the assets of the principal company incorporate the new companies, so this is not considered as the
legitimate use of the corporate personality. So, Evasion of tax or avoiding welfare legislation is the most
common ground of lifting up of the corporate veil.

Workmen of Associated Rubber Industry Ltd VS Associated Rubber Industry

  Determination of the enemy character of the company

Dailmer Co Ltd

-VS-
Continental Tyre and Rubber Co Ltd.
Few German Citizens incorporates a German Company for the manufacture of Rubber and Tyre these citizens
to spread their company incorporates a company in England with the name Dailmer Co Ltd of which one
shareholder was from England and others were from Germany. This Dailmer company used to sell the
products of the company situated in Germany in England, so in this meantime Dailmer was carrying out many
transactions with another company in England named as Continental Tyre and Rubber Co Ltd. This English
Company was sued by the Dailmer Co Ltd for recovery of trade debt during the First World War. Held the
company was an alien company since it was controlled by the Germans. Payment of debt to the English
Company controlled by such German company would amount to trading with the enemy. Therefore, the suit
filed by the company to recover a trade debt was dismissed.

 Public Interest

The Courts have the discretion to lift the veil to protect public policy and prevent transactions which are
in contravention to public policy. Thus, where there is a conflict with public policy, the courts usually take
into account the substance and ignore the form.

Connors Bros vs Connors (1940)

• In this case the acts done by the members of the company led the court to lift the corporate veil to
punish the offenders as the company had been formed to accomplish an act that is against the public
policy.
• The principle was applied against the managing director who made use of his position to contrary to
the public policy.

The House of Lords determined the character of the company as an enemy company because the persons who
were de facto who were residents of Germany, which was at war with the British during that time.

The alien company was not allowed to proceed with the action, which was directly or indirectly meant giving
money to the enemy, thus was considered against the public policy.

Landmark cases which helped shape the doctrine

In recent times, the courts have pronounced several landmark judgements shaping the doctrine of piercing the
corporate veil. Over time, the judiciary has taken new approach in piercing

State of Rajasthan and Ors. vs. Gotan Lime Stone Khanji Udyog Pvt. Ltd. and Ors. (2016)

In the case of the State of Rajasthan and Ors. vs. Gotan Lime Stone Khanji Udyog Pvt. Ltd. and Ors. (2016),
the Supreme Court held that the veil can be lifted if the company acts against public interest. The Gotan Lime
decision is a significant development in Indian corporate law. It sends a clear message that companies cannot
use the corporate veil to shield themselves from liability for wrongdoing. The decision also provides a
valuable tool for regulators and law enforcement agencies to pursue companies that engage in illegal or
unethical conduct.
Here are some of the key implications of the Gotan Lime decision:
 • Increased accountability for shareholders and directors: The decision makes it clear that
shareholders and directors can be held personally liable for the debts and obligations of a company
if the company is used to perpetrate fraud or to evade legal obligations. This increased
accountability is likely to make shareholders and directors more cautious about the activities of the
companies they own and manage.
• Greater scrutiny of corporate conduct: The decision is also likely to lead to greater scrutiny of
corporate conduct by regulators and law enforcement agencies. Companies will need to be more
careful to comply with all applicable laws and regulations, as they may be held accountable for
any wrongdoing.
• Potential for more lawsuits: The decision may also lead to an increase in lawsuits against
companies and their shareholders and directors. Shareholders and directors who are concerned
about their personal liability may be more likely to file lawsuits against companies that they believe
are engaging in illegal or unethical conduct.

Richter Holding Ltd. vs. The Assistant Director of Income Tax (2011)

In the case of Richter Holding Ltd. vs. The Assistant Director of Income Tax (2011), the Karnataka High Court
held that the income tax department, being the fact-finding authority, may lift the veil to find the true nature
of the transaction. At the heart of the dispute was the interpretation of Section 2(22)(e) of the Income Tax
Act, which empowers the income tax department to disregard the separate legal entity of a company if it finds
that the company was formed or is being used for the purpose of avoiding or reducing tax liability. The
department argued that this provision granted it the authority to lift the corporate veil and examine the true
nature of the transaction in question.

The decision of the Karnataka High Court in Richter Holding Ltd. vs. The Assistant Director of Income
Tax
(2011) is a significant development in the area of corporate taxation. It clarifies the income tax department’s
power to lift the corporate veil and provides important safeguards to protect the rights of taxpayers. This
decision serves as a reminder that, while corporate personality is a fundamental principle of the law, it cannot
be used as a shield for tax avoidance or evasion.

The Lifting of Corporate veil under the Companies Act 2013 helps to ensure that the corporate personality is
used for legal purpose and not on fraudulent practice or illegal activities.
A company has a legal personality just like all other natural individuals, the only difference between the two
is that a company even with its legal personality cannot run or conduct its affairs as a natural person does.
The company acts on the concept of the corporate veil, this veil when misused for fraudulent acts will reveal
the true nature and real beneficiaries of the company, thus, called the lifting of the corporate veil. The courts
from time to time implemented this rule and also brought in a few changes suitable for the situations and for
future reference.