Incorporation of a company by registration was introduced in 1844 and the doctrine of

limited liability of a company followed in 1855. Subsequently in 1897 in Salomon v.

Salomon & Company, 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 laid down the principle that a company is a distinct legal person entirely
different from the members of that company. This principle is referred to as the veil of
incorporation.
The chief advantage of incorporation from which all others follow is the separate entity of
the company. In reality, however, the business of the legal person is always carried on by,
and for the benefit of, some individuals. In the ultimate analysis, some human beings are
the real beneficiaries of the corporate advantages, for while, by fiction of law, a
corporation is a distinct entity, yet in reality it is an association of persons who are in fact
the beneficial owners of all the corporate property." And what the Salomon case decides
is that in questions of property and capacity, of acts done and rights acquired or,
liabilities assumed therebythe personalities of the natural persons who are the
companies corporators is to be ignored".
This theory of corporate entity is indeed the basic principle on which the whole law of
corporations is based. Instances are not few in which the Courts have successfully
resisted the temptation to break through the corporate veil.
But the theory cannot be pushed to unnatural limits. There are situations where the Court
will lift the veil of incorporation in order to examine the realities which lay behind.
Sometimes this is expressly authorized by statuteand sometimes the Court will lift its
own volition".

Meaning Of Lifting Or Piercing Of The

Corporate VeilThe human ingenuity however started using the veil of corporate personality blatantly as
a cloak for fraud or improper conduct. Thus it became necessary for the Courts to break
through or lift the corporate veil and look at the persons behind the company who are the
real beneficiaries of the corporate fiction.
Lifting of the corporate veil means disregarding the corporate personality and looking
behind the real person who are in the control of the company. In other words, where a
fraudulent and dishonest use is made of the legal entity, the individuals concerned will not
be allowed to take shelter behind the corporate personality. In this regards the court will
break through the corporate shell and apply the principle of what is known as lifting or

piercing through the corporate veil." And while by fiction of law a corporation is a
distinct entity, yet in reality it is an association of persons who are in fact the beneficial
owners of all the corporate property. In United States V. Milwaukee Refrigerator Co., the
position was summed up as follows:
A corporation will be looked upon as a legal entity as a general rulebut 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."
In Littlewoods Mail Order Stores Ltd V. Inland Revenue Commrs, Denning observed as
follows:
The doctrine laid down in Salomon v. Salomon and Salomon Co.Ltd, has to be watched
very carefully. It has often been supposed to cast a veil over the personality of a limited
liability company through which the Courts cannot see. But, that is not true. The Courts
can and often do draw aside the veil. They can and often do, pull off the mask. They look
to see what really lies behind".

Judicial Provisions Or Grounds For Lifting The

VeilFRAUD OR IMPROPER CONDUCT- The 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 Salomon principal to be used as an engine of fraud. The two
classic cases of the fraud exception are Gilford Motor Company Ltd v. Horne and Jones v.
Lipman. 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 sham to cloak his
wrongdoings.
AGENCY OR TRUST- Where a company is acting as agent for its shareholder, the
shareholders will be liable for the acts of the company. It is a question of fact in each case
whether the company is acting as an agent for its shareholders. There may be an Express
agreement to this effect or an agreement may be implied from the circumstances of each
particular case. In the case of F.G.Films ltd, An American company financed the

production of a film in India in the name of a British company. The president of the
American company held 90 per cent of the capital of the British company. The Board of
trade of Great Britain refused to register the film as a British film. Held, the decision was
valid in view of the fact that British company acted merely as he nominee of the
American Company.
AVOIDANCE OF WELFARE LEGISLATION- Avoidance of welfare legislation is as
common as avoidance of taxation and the approach of the Courts in considering problems
arising out of such avoidance is generally the same as avoidance of taxation. It is the duty
of the Courts in every case where ingenuity is expended to avoid welfare legislation to get
behind the smokescreen and discover the true state of affairs.
PUBLIC INTEREST- The Courts may lift the veil to protect public policy and prevent
transactions contrary to public policy. The Courts will rely on this ground when lifting the
veil is the most just result, but there are no specific grounds for lifting the veil. Thus,
where there is a conflict with public policy, the Courts ignore the form and take into
account the substance.

Statutory Provisions For Lifting The VeilREDUCTION OF NUMBER OF MEMBERS- Under Section 45 of The Indian
Companies Act, 1956, if a company carries on business for more than six months after the
number of its members has been reduced to seven in case of a public company and two in
case of a private company, every person who knows this fact and is a member during the
time that the company so carries on business after the six months, becomes liable jointly
and severally with the company for the payment of debts contracted after six months. It is
only that member who remains after six months who can be sued.
FRAUDULENT TRADING- Under Section 542 of The Indian Companies Act, 1956, if
any business of a company is carried on with the intent 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. This applies whether or not the company has been or is in
the course of being wound up. This was upheld in Delhi Development Authority v.
Skipper Constructions Co. Ltd. (1997).
MISDESCRIPTION OF THE COMPANY- Section 147 (4) of The Indian Companies Act,
1956, 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 fine and he is
personally liable to the holder of the instrument unless the company has already paid the
amount.
PREMATURE TRADING- Another example of personal liability is mentioned in Section
117 (8) of The English Companies Act. 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 reregistered as a private company. If it enters into any transaction contrary to this provision
not only are the company and it's officers in default , liable to pay fines but if 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.
FAILURE TO REFUND APPLICATION MONEY-According to Section 69(5) of The
Indian Companies Act, 1956, the directors of a company are jointly and severally liable to
repay the application money with interest if the company fails to refund the money within
130 days of the date of issue of prospectus.
HOLDING AND SUBSIDIARY COMPANIES- In the eyes of law, the holding company
and its subsidiaries are separate legal entities.
But in the following two cases the subsidiary may lose its separate entityWhere at the end of its financial year, the company has subsidiaries, it must lay before its
members in general meeting not only its own accounts, but also attach therewith annual
accounts of each of its subsidiaries along with copy of the boards and auditors report
and a statement of the holding companys interest in the subsidiary.
The Court may, on the facts of a case, treat a subsidiary as merely a branch or department
of one large undertaking owned by the holding company.

Conclusion-

Thus it is abundantly clear that incorporation does not cut off personal liability at all
times and in all circumstances. Honest enterprise, by means of companies is allowed; but
the public are protected against kitting and humbuggery". The sanctity of a separate entity
is upheld only in so far as the entity is consonant with the underlying policies which give
it life.
Thus those who enjoy the benefits of the machinery of incorporation have to assure a
capital structure adequate to the size of the enterprise. They must not withdraw the
corporate assets or mingle their own individual accounts with those of the corporation.
The Courts have at times seized upon these facts as evidence to justify the imposition of
liability upon the shareholders.
The act of piercing the corporate veil until now remains one of the most controversial
subjects in corporate law. There are categories such as fraud, agency, sham or facade,
unfairness and group enterprises, which are believed to be the most peculiar basis under
which the Law Courts would pierce the corporate veil. But these categories are just
guidelines and by no means far from being exhaustive.

Law acc

INTRODUCTION
Before dealing with the lifting of corporate veil it is pertinent to define what the
meaning of a company is. Strictly, a company has no particular definition but section
3(1) (i) of the Companies Act attempts to provide the meaning of the word in context
of the provisions and for the use of this act. It states: a company means a company
formed and registered under this Act or an existing company as defined in section 3
(1) (ii). The company must be registered under the Companies Act for it to become
an incorporated association. If it is not registered it becomes an illegal association.
This paper would deal with the lifting of corporate veil and its aspects with the judicial
decisions. Let us first discuss the exact meaning of corporate veil and lifting of
corporate veil with limited liability concept.
Corporate veil:

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 companys debts and other obligations.
Lifting of Corporate veil:

At times it may happen that the corporate personality of the company is used to
commit frauds and improper or illegal acts. Since an artificial person is not capable of
doing anything illegal or fraudulent, the faade of corporate personality might have to
be removed to identify the persons who are really guilty. This is known as lifting of
corporate veil.
It refers to the situation where a shareholder is held liable for its corporations debts
despite the rule of limited liability and/of separate personality. The veil doctrine is
invoked when shareholders blur the distinction between the corporation and the
shareholders. 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: firstly through direct liability (for direct
infringement) and secondly through secondary liability (for acts of its human agents
acting in the course of their employment).
There are two existing theories for the lifting of the corporate veil. The first is the
alter-ego or other self theory, and the other is the instrumentality theory.
The alter-ego theory considers if there is in distinctive nature of the boundaries
between the corporation and its shareholders.
The instrumentality theory on the other hand examines the use of a corporation by its
owners in ways that benefit the owner rather than the corporation. It is up to the court
to decide on which theory to apply or make a combination of the two doctrines.
Concept of limited liability:
One of the main motives for forming a corporation or company is the limited liability
that it offers to its shareholders. By this doctrine, a shareholder can only lose what he
or she has contributed as shares to the corporate entity and nothing more. This
concept is in serious conflict with the doctrine of lifting the veil as both these do not
co-exist which is discussed by us in the paper in detail.

DEVELOPMENT OF THE CONCEPT OF LIFTING THE

CORPORATE VEIL
One of the main characteristic features of a company is that the company is a
separate legal entity distinct from its members. The most illustrative case in this
regard is the case decided by House of Lords- Salomon v. A Salomon & Co. Ltd[i]. In
this case Mr. Solomon had business of shoe and boots manufacture. A Salomon &
Co. Ltd. was incorporated by Solomon with seven subscribers-Himself, his wife, a
daughter and four sons. All shareholders held shares of UK pound 1 each. The
company purchased business of Salomon for 39000 pounds, the purchase
consideration was paid in terms of 10000 pounds debentures conferring charge on
the companys assets, 20000 pounds in fully paid 1 pound share each and the
balance in cash. The company in less than one year ran into difficulties and
liquidation proceedings commenced. The assets of the company were not even
sufficient to discharge the debentures (held entirely by Salomon itself) and nothing
was left to the insured creditors. The House of Lords unanimously held that the
company had been validly constituted, since the Act only required seven members
holding at least one share each and that Salomon is separate from Salomon & Co.
Ltd. The entity of the corporation is entirely separate from that of its shareholders; it
bears its own name and has a seal of its own; its assets are distinct and separate
from those of its members; it can sue and be sued exclusively for its purpose; liability
of the members are limited to the capital invested by them.[ii] Further in Lee v. Lees
Air Farming Ltd.[iii], it was held that there was a valid contract of service between
Lee and the Company, and Lee was a therefore a worker within the meaning of the
Act. It was a logical consequence of the decision in Salomons case that one person
may function in the dual capacity both as director and employee of the same
company.
In The King v Portus; ex parte Federated Clerks Union of Australia[iv], 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.

In course of time, the doctrine that a company has a separate and legal entity of its
own has been subjected to certain exceptions by the application of the fiction that the
veil of corporation can be lifted and its face examined in substance.
Thus when Tata Company or German Company or Government Company is
referred to, we look behind the smoke-screen of the company and find the individual
who can be identified with the company. This phenomenon which is applied by the
courts and which is also provided now in many statutes is called lifting of the
corporate veil. As a consequence of the lifting of the corporate veil, the company as
a separate legal entity is disregarded and the people behind the act are identified
irrespective of the personality of the company. So, this principle is also
called disregarding the corporate entity.

LIFTING THE CORPORATE VEIL

Meaning of the doctrine:

Lifting the corporate refers to the possibility of looking behind the companys
framework (or behind the companys separate personality) to make the members
liable, as an exception to the rule that they are normally shielded by the corporate
shell (i.e. they are normally not liable to outsiders at all either as principles or as
agents or in any other guise, and are already normally liable to pay the company
what they agreed to pay by way of share purchase price or guarantee, nothing more).
[v]
When the true legal position of a company and the circumstances under which its
entity as a corporate body will be ignored and the corporate veil is lifted, the
individual shareholder may be treated as liable for its acts.
The corporate veil may be lifted where the statute itself contemplates lifting the veil or
fraud or improper conduct is intended to be prevented.
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 public interest, the effect on parties who may be
affected, etc.. This was iterated by the Supreme Court in Life Insurance Corporation
of India v. Escorts Ltd.[vi]

The circumstances under which corporate veil may be lifted can be categorized
broadly into two following heads:
1. Statutory Provisions
2. Judicial interpretation
STATUTORY PROVISIONS

Section 5 of the Companies Act defines the individual person committing a wrong or
an illegal act to be held liable in respect of offences as officer who is in default. This
section gives a list of officers who shall be liable to punishment or penalty under the
expression officer who is in default which includes a managing director or a wholetime director.
Section 45- Reduction of membership below statutory minimum: This section
provides that if the members of a company is reduced below seven in the case of a
public company and below two in the case of a private company (given in Section 12)
and the company continues to carry on the business for more than six months, while
the number is so reduced, every person who knows this fact and is a member of the
company is severally liable for the debts of the company contracted during that time.
In the case of Madan lal v. Himatlal & Co.[vii] the respondent filed suit against a
private limited company and its directors for recovery of dues. The directors resisted
the suit on the ground that at no point of time the company did carry on business
with members below the legal minimum and therefore, the directors could not be
made severally liable for the debt in question. It was held that it was for the
respondent beingdominus litus, to choose persons of his choice to be sued.
Section 147- Misdescription of name: Under sub-section (4) of this section, an
officer of a company who signs any bill of exchange, hundi, promissory note, cheque
wherein the name of the company is not mentioned is the prescribed manner, such
officer can be held personally liable to the holder of the bill of exchange, hundi etc.
unless it is duly paid by the company. Such instance was observed in the case of
Hendon v. Adelman.[viii]
Section 239- Power of inspector to investigate affairs of another company in same
group or management: It provides that if it is necessary for the satisfactory
completion of the task of an inspector appointed to investigate the affairs of the

company for the alleged mismanagement, or oppressive policy towards its members,
he may investigate into the affairs of another related company in the same
management or group.
Section 275- Subject to the provisions of Section 278, this section provides that no
person can be a director of more than 15 companies at a time. Section 279 provides
for a punishment with fine which may extend to Rs. 50,000 in respect of each of
those companies after the first twenty.
Section 299- This Section gives effect to the following recommendation of the
Company Law Committee: It is necessary to provide that the general notice which a
director is entitled to give to the company of his interest in a particular company or
firm under the proviso to sub-section (1) of section 91-A should be given at a
meeting of the directors or take reasonable steps to secure that it is brought up and
read at the next meeting of the Board after it is given.[ix] The section applies to all
public as well as private companies. Failure to comply with requirements of this
Section will cause vacation of the office of the Director and will also subject him to
penalty under sub-section (4).
Sections 307 and 308- Section 307 applies to every director and every deemed
director. Not only the name, description and amount of shareholding of each of the
persons mentioned but also the nature and extent of interest or right in or over any
shares or debentures of such person must be shown in the register of shareholders.
Section 314- The object of this section is to prohibit a director and anyone
connected with him, holding any employment carrying remuneration of as such sum
as prescribed or more under the company unless the company approves of it by a
special resolution.
Section 542- Fraudulent conduct: If in the course of the winding up of the company,
it appears that any business of the company has been carried on with intent to
defraud the creditors of the company or any other person or for any fraudulent
purpose, the 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 court may
direct. In Popular Bank Ltd., In re[x] it was held that section 542 appears to make the
directors liable in disregard of principles of limited liability. It leaves the Court with

discretion to make a declaration of liability, in relation to all or any of the debts or

other liabilities of the company. This [xi]section postulates a nexus between
fraudulent reading or purpose and liability of persons concerned.
JUDICIAL INTERPRETATIONS

By contrast with the limited and careful statutory directions to lift the veil judicial
inroads into the principle of separate personality are more numerous. Besides
statutory provisions for lifting the corporate veil, courts also do lift the corporate veil
to see the real state of affairs. Some cases where the courts did lift the veil are as
follows:
1. United States v. Milwaukee Refrigerator Transit Company[xii]- In this case the U.S.
Supreme Court held that where the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud or defend crime, the law will disregard the
corporate entity and treat it as an association of persons.

Some of the earliest instances where the English and Indian Courts disregarded the
principle established in Salomons case are:
2. Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd[xiii]- This is
an instance of determination of enemy character of a company. In this case, there
was a German company. It set up a subsidiary company in Britain and entered into a
contract with Continental Tyre and Rubber Co. (Great Britain) Ltd. for supply of tyres.
During the time of war the British company refused to pay as trading with an alien
company is prohibited during that time. To find out whether the company was a
German or a British company, the Court lifted the veil and found out that since the
decision making bodies, the board of directors and the general body of share holders
were controlled by Germans, the company was a German company and not a British
company and hence it was an enemy company.
3. Gilford Motor Co. v. Horne[xiv]- This is an instance for prevention of faade or sham.
In this case an employee entered into an agreement that after his employment is
terminated he shall not enter into a competing business or he should not solicit their
customers by setting up his own business. After the defendants service was
terminated, he set up a company of the same business. His wife and another
employee were the main share holders and the directors of the company. Although it
was in their name, he was the main controller of the business and the business

solicited customers of the previous company. The Court held that the formation of the
new company was a mere cloak or sham to enable him to enable him to breach the
agreement with the plaintiff.
4. Re, FG (Films) Ltd[xv]- In this case the court refused to compel the board of film
censors to register a film as an English film, which was in fact produced by a powerful
American film company in the name of a company registered in England in order to
avoid certain technical difficulties. The English company was created with a nominal
capital of 100 pounds only, consisting of 100 shares of which 90 were held by the
American president of the company. The Court held that the real producer was the
American company and that it would be a sham to hold that the American company
and American president were merely agents of the English company for producing
the film.
5. Jones v. Lipman[xvi]- In this case, seller of a piece of land sought to evade specific
performance of a contract for the sale of the land by conveying the land to a company
which he formed for the purpose and thus he attempted to avoid completing the sale
of his house to the plaintiff. Russel J. describing the company as a devise and a
sham, a mask which he holds before his face and attempt to avoid recognition by the
eye of equity and ordered both the defendant and his company specifically to
perform the contract with the plaintiff.
6. Tata Engineering and Locomotive Co. Ltd. State of Bihar[xvii] In this case it was
stated that a company is also not allowed to lay claim on fundamental rights on the
basis of its being an aggregation of citizens. Once a company is formed, its business
is the business of an incorporated body thus formed and not of the citizens and the
rights of such body must be judged on that footing and cannot be judged on the
assumption that they are the rights attributable to the business of the individual
citizens.
7. N.B. Finance Ltd. v. Shital Prasad Jain[xviii]- In this case the Delhi High Court
granted to the plaintiff company an order of interim injunction restraining defendant
companies from alienating the properties of their ownership on the ground that the
defendant companies were merely nominees of the defendant who had fraudulently
used the money borrowed from the plaintiff company and bought properties in the

name of defendant companies. The court did not in this case grant protection under
the doctrine of corporate veil.
8. Shri Ambica Mills Ltd. v. State of Gujarat[xix]- It was held that the petitioners were as
good as parties to the proceedings, though their names were not expressly
mentioned as persons filing the petitions on behalf of the company. The managing
directors in their individual capacities may not be parties to such proceedings but in
the official capacity as managing directors and as officers of the company, they could
certainly be said to represent the company in such proceedings. Also as they were
required to so act as seen from the various provisions of the Act and the Rules they
could not be said to be total strangers to the company petition.

COMPANIES BILL 2011

India being one of the top three emerging economies, has been longing for strong
and cogent corporate laws that will enable the countrys international trade to
conduct its affairs on a par with the western industrialized nations. The proposals in
the Bill are expected to act as a catalyst to fostering growth of the economy. One of
the main highlights of this Bill is that it proposes a mechanism for vigilance that will
reward whistle blowers. This measure will allow companies to follow transparency at
every move they initiate. The authors have mentioned a few provisions which bring in
responsibilities and liabilities upon a director.
Section 127- A director of a company is punishable with imprisonment or fine if a
dividend which is declared has not been paid or a warrant which in respect thereof
has not been posted within 30 days of the date of declaration.
Section 159 r/w 156- It is the duty of every existing director to intimate his Director
Identification Number to the company or all companies wherein he is a director within
one month of the receipt of the same from the Central Government. If any director of
a company contravenes, such director shall be punishable with imprisonment or with
fine under Section 159.
Section 166- Under this section various duties of a director are enumerated such as
the duty of good faith, of due and reasonable care, to act in accordance with the
articles of association etc. Any director in violation of these duties will be punishable
with a fine of not less that Rs 1 lakh and not more than Rs 5 lakhs.

Section 184- This section imposes a duty upon a director of a company to disclose
his concern or interest, including shareholding, in any company or companies, or
bodies corporate, companies, firms, or other associations of individuals or if he is a
party to any contract or agreement with a body corporate in which such director
holds more than 2% shareholding or otherwise as mentioned or any firm in which
such director is a partner or owner etc. Sub-section (4) is the penalty clause.
Section 194- This section puts a prohibition in forward dealings of securities of the
company, its subsidiaries or in its holding or associate company by a director of such
company. In any contravention to this effect, the director will be punishable with
imprisonment or/and fine as prescribed.

APPROACH OF THE INDIAN COURTS IN THE 21ST

CENTURY
1. Subhra Mukherjee v. Bharat Coking Coal Ltd.[xx]- Sham or faade- In this case a
private coal company sold its immovable property to the wives of directors prior to
nationalization of the company. In fact, documents were ante-dated to show the
transaction was prior to nationalization of the company). Where such transaction is
alleged to be sham and collusive, the Court was justified in piercing the veil of
incorporation to ascertain the true nature of the transaction as to know who were the
real parties to the sale and whether it was genuine and bona fide or whether it was
between the husbands and wives behind the faade of the separate entity of the
company.
2. Bajrang Prasad Jalan v. Mahabir Prasad Jalan[xxi]- Subsidiary-holding companyThe court, for the purpose of considering a complaint of oppression held that the
corporate veil can be lifted in the cases of not merely of a holding company, but also
its subsidiary when both are family companies.
3. Singer India v. Chander Mohan Chadha[xxii]- The concept of corporate entity was
evolved to encourage and promote trade and commerce but not to commit illegalities
or to defraud the people. Where therefore the corporate charter is employed for the
purpose of committing illegality or for defrauding others, the court would ignore the
corporate character and will look at the reality behind the corporate veil so as to
enable it to pass appropriate orders to do justice between the parties concerned.

4. Saurabh Exports v. Blaze Finance & Credits (P.) Ltd. [xxiii]- Defendant no. 1 was a
private limited company. Defendant no. 2 and 3 were the directors of that company.
Defendant no. 4 was the husband of D-3 and the brother of D-2. Allegedly on
representation of D-4 that D-1 company was inviting short term deposits at good
interest rates, plaintiff made a deposit of Rs. 15 lakhs in the company for a period of 6
months. When the company failed to pay the amount, the plaintiff sued it for the said
amount along with interest. D-2 and 3 denied their liability in the ground that there
was no personal liability of the directors as the deposit was received in the name of
the company. D-4 denied the liability on the ground that it had nothing to do with the
transaction in question as he was neither a director nor a shareholder of the company
so it was held that he had no locus in the company and hence not liable. It was held
that D-3 being a house wife had little role to play and therefore could not be made
liable. The plaintiff was sought to be defrauded under the cloak of a corporate entity
of D-1 and, therefore, corporate veil was lifted taking into consideration that D-1 was
only a family arrangement of the remaining defendants. D-2 was running the
business in the name of the company. So D-1 and D-2 were both personally liable.
5. Universal

Pollution

Control

India

(P.)

Ltd.

v.

Regional

Provident

Fund

Commissioner[xxiv]- This is a case of default in payment of employees provident

fund- Certain amount was due and payable to provident fund office by the sister
concern of the petitioner-company, a demand was raised on the petitioner company
only on the ground that two directors of these two companies were common. It was
held that the contention raised by the respondent that the Court should lift the
corporate veil and fasten the liability on the petitioner was without any merits and was
baseless. Both the companies were separate legal entities under the provisions of
the Companies Act and there was no provision under the Provident Fund Act that a
liability of one company can be fastened on the other company even by lifting the
corporate veil.
6. The Decision of Karnataka High Court. Decided On 24.03.2011 Richter Holding
Ltd. v. The Assistant Director of Income Tax[xxv]- Richter Holdings Ltd., a Cypriot
company and West Globe Limited, a Mauritian company purchased all shares of
Finsider International Co. Ltd. (FICL), a U.K. company from Early Guard Ltd. another
U.K. company. FICL held 51% shares of Sesa Goa Ltd. (SGL), an Indian company.
The Tax department issued a show cause notice to Petitioner alleging that the
Petitioner had indirectly acquired 51% in Sesa Goa Ltd and was therefore, liable to

deduct tax at source before making payment to Early Guard Limited. The Income Tax
Department contended that as per section 195 of the Act, the Petitioner is liable to
deduct tax at source in respect of payment made for purchase of capital asset. The
High Court of Karnataka held that the Petitioner should reply to show-cause notice
issued by the Tax department and urge all their contentions before it. The High Court
also emphasized that the fact finding authority (Tax Department) may lift the
corporate veil to look into the real nature of the transaction to ascertain the vital facts.

The aspect that deserves greater attention is that the Karnataka High Court
demonstrates a keen interest in lifting the corporate veil. This has a number of
implications. First, the Richter Holding Case extends even further the scope of the
principles laid down in the Vodafone Case. For example, in Vodafone the Bombay
High Court did not consider lifting the corporate veil to impose taxation in case of
indirect transfers. Second, it is not clear from the judgment itself whether the tax
authorities advanced the argument regarding lifting the corporate veil. Third, the
Karnataka High Court appears to have readily permitted lifting the corporate veil
without at all alluding to the jurisprudence on the subject-matter. Generally, courts
defer to the sanctity of the corporate form as a separate legal personality and are
slow to lift the corporate veil, as evidenced by Adams v. Cape Industries[xxvi],
unless one of the established grounds exist.[xxvii]

CONCLUSION
It should be noted that the principle of Salomon v. A. Salomon & Co. Ltd.[xxviii] is
still the rule and the instances of piercing the veil are the exceptions to this rule. The
legislature and the courts have in many cases now allowed the corporate veil to be
lifted. The principle that a company has its own separate legal personality of its own
finds an important place in the Constitution of India as well. Article 21 of the
Constitution of India, says that: No person shall be deprived of his life and personal
liberty except according to procedure established by law. Under Article a company
also has the right to life and personal liberty as a person. This was laid down in the
case of Chiranjitlal Chaudhary v. Union of India[xxix] where the Supreme Court held
that fundamental rights guaranteed by the constitution are available not merely to
individual citizens but to corporate bodies as well except where the language of the
provision or the nature of right compels the inference that they are applicable only to
natural persons.

So, a corporation can own and sell properties, sue or be sued, or commit a criminal
offence because a corporation is made up of and run by people, acting as agents of
the company. It is under the seal of the company that the members or shareholders
commit fraud or such acts and therefore the company should also be liable as it also
a person which is accorded fundamental rights under Article 21 of the Constitution of
India.
The other side of this coin can be that, as the company is privileged to have its own
right to life and personal liberty, how can its fundamental right be taken away by
disregarding its corporate entity for the wrongs committed by its members and not
the company itself.
As a result of incorporation, an incorporated company wears a corporate veil and
thus acquires the corporate personality, behind which there are shareholders who
have formed the company. Although in law the company has an independent
personality,

it

is

an

artificial

person

and

hence,

behind

the

corporate

curtain, there are natural persons, i.e. shareholders who have associated themselves
into a company. So if this corporate personality is uncovered or unveiled, the
shareholders or the directors mostly are found to be behind the veil.