INTRODUCTION

The term company has been derived from the Latin term complainant which means with or
together and panis which means bread, it originally meant an association of person who had
meals together/ company. Today company means a group of persons who are associated together
for the attainment of a common end or goal.

Corporate personality has been described as the ‘most pervading of the fundamental principles
of company law”. It constitutes the bedrock principle upon which company is regarded as an
entity distinct from the shareholders constituting it. When a company is incorporated, it is treated
as a separate legal entity distinct from its promoters, directors, members, and employees; and
hence the concept of the corporate veil, separating those parties from the corporate body, has
arisen. The issue of “lifting the corporate veil” has been considered by courts and commentators
for many years and there are instances in which the courts have deviated from the strict
application of this doctrine. This doctrine has been established for business efficacy, necessity
and convenience. In the doctrine of ‘Lifting the Corporate Veil’, the law goes behind the mask or
veil of incorporation in order to determine the real person behind the mask of a company. One of
the main motivations for forming a corporation or company is the limited liability it offers its
shareholders. By this doctrine of limited liability, a shareholder can only lose only what he or she
has contributed as shares to the corporate entity and nothing more.1

A corporation formed for the purposes of trade and commerce is called as a company2. The
incorporation of companies by registration leads to the coming into existence of a new corporate
personality as distinct from the shareholders. The incorporation provides for the perpetual
succession and the a common seal, further in case of limited companies the liability of the
member is limited, being a legal person the public financial institution also provide for easy loan
etc.

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

1
https://blog.ipleaders.in/corporate-veil/ on 01-4-18 at 5:30p,
2
Ibid
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. 3

The “corporate veil” metaphorically symbolises the distinction between the company as a
separate legal entity and the shareholders who own the shares in the company. The effect of
‘lifting’ or ‘piercing’ the corporate veil is that the shareholders, rather than the company, are
regarded as the relevant actors on whom liability of the obligations of the company are placed.
Lifting the veil can be used to impose liability upon the shareholders or for other purposes, such
as ascertaining appropriate jurisdiction. Whilst there is a general reluctance to lift the corporate
veil, there is a body of case law where the courts have considered doing so.

The Legal personality of a Company

The fundamental attribute of corporate personality, from which all other consequences flow if
that the corporation is a legal entity distinct from its members. Hence, it is capable of enjoying
rights and of being subjects to duties which are not the same as those enjoyed or borne by its
members.

Corporate personality became an attribute of the normal joint stock company only at a
comparatively late stage in its development, and it was not until Solomon v. Solomon & Co.4
that its implications were fully grasped even by the courts. Solomon had for many years carried
on a sole trader a prosperous business as a leather merchant. In 1892, he decided to convert it
into a limited company and for this purpose Solomon & Co. Ltd. was formed by Solomon, his
wife and five of his children as members and Solomon as managing director. The company
purchased the business as a going concern for £39,000 which was a sum which represented the
expectations of a fond owner rather than anything that can be called businesslike or a reasonable

3
www.lawctopus.com/academike/corporate-veil-2/ on 01-4-18 at 9:00 am
4
[1897] A.C. 22, HL
estimate of value. The price was satisfied by £10,000 in debentures, conferring a charge over all
the company’s assets, £20,000 in fully paid £1shares and the balance in cash. The result was that
Solomon held 20,001 of the 20,007 shares issued and each of the remaining six shares was held
by a member of his family each, apparently as a nominee for him. The company almost
immediately ran into difficulties and only a year later the then holder of debentures appointed a
receiver and the company went into liquidation. Its assets were sufficient to discharge the
debenture but nothing was left for the unsecured creditors.

The Court of Appeal held that the whole transaction was contrary to the true intent of the
Companies Act and that the company was a mere sham, and an alias, trustee or nominee for
Solomon who remained the real proprietor of the business. As such, he was liable to indemnify
the company against its trading debts. But the House of Lords unanimously reversed this
decision. They held that the company has been validly formed since the Act merely required
seven members holding at least one share each. It said nothing about their independent, or that
they should take a substantial interest in the undertaking, or that they should have a mind and
will of their own, or that there should be anything like a a balance of power in the constitution of
the company. Hence, the business belonged to the company and not to Solomon and Solomon
was its agent. Thus, this case established that provided the formalities of the Act are complied
with, a company will be validly incorporated, even if it is a “one person company” and the courts
will be reluctant to treat a shareholder as personally liable for the debts of the company by
piercing the corporate veil. Thus, the court held that there was no fraud since the shareholders
were fully conversant with what was being done.

In case of Daimler Co. Ltd. v. Continental Tyre and Rubber Co.5the court further evolved the
doctrine of lifting of the corporate veil, the court lifted the veil and held that company being a
Germany company at the time of war was an enemy company.

The Supreme Court in Tata Engineering Locomotive Co. Ltd v. State of Bihar & Ors.6 stated:
“the corporation in law is equal to a natural person and has a legal entity of its own. The entity of
corporation is entirely separate from that of its shareholders; it bears its own names and has seal

5
[1933] 1 CH 935

6
AIR 1965 SC 40
of its own; its assets are separate and distinct from those of its members; the liability of the
members of the shareholders is limited to the capital invested by them; similarly, the creditors of
the members have no right to the assets of the corporation.” Thus, even in India it can be seen
that at present, the consensus is that cracking open the veil is somewhat cautious and
circumspect.

Lifting the 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 façade of corporate personality might have to be removed to identify the persons
who are really guilty. This is known as ‘lifting of corporate veil’.

Piercing or lifting the veil is corporate law’s most widely used doctrine to decide when a
shareholder or shareholders will be held liable for obligations of the corporation. It continues to
be one of the most litigated and most discussed doctrines in all of corporate law

It refers to the situation where a shareholder is held liable for its corporation’s 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).

The term “piercing the corporate veil” has also been described as, “the Court’s unwillingness to
permit corporate presence and action to divert judicial course of applying law to ascertain facts.
When this principle is invoked, it is permissible to show that the individual hiding behind the
 corporation is liable to discharge the obligations ignoring the concept of corporation as a separate
entity

The concept of corporate entity was evolved to encourage and promote trade and commerce but
not to commit illegalities or to defraud people. The corporate veil indisputably can be pierced
when the corporate personality is found to be opposed to justice, convenience and interest of the
revenue or workman or against public interest.

The Grounds for Lifting of Corporate Veil

The circumstances under which the Courts may lift the corporate veil may broadly be grouped
under the following two heads:

Under statutory provisions

 When membership is reduced

Under section 45 of the Companies Act, when the number of members of a company are reduced
below 7 in case of a public company and below 2 in case of a private company and the company
continues to carry on its business for more than 6 months while the number is so reduced, every
person who is a member of such company, knows this fact, is severally liable for the debts of the
company contracted during that time.

 Improper use of Name

Section 147(4) provides that an officer of a company who signs any Bill of Exchange, Hundi,
Promissory note, cheque, wherein the name of the company is not mentioned in the prescribed
manner, such officer shall be held personally liable to the holder of such Bill of exchange, hundi,
promissory note or cheque as the case may be; unless it is duly paid by the company.7

 Fraudulent conduct

7
Business Law Including Company Law, S.S .Gulshan 14 th edition 279.
 If in the course of winding up of a company, it appears that any business of the company has
been carried on with the intent to defraud the creditors of the company or any other person or for
any other fraudulent purpose, the persons who were knowingly parties to the carrying on of the
business, in the manner aforesaid, shall be personally liable for all or any of the debts or other
liabilities of the company, as the court may direct.( Section 542)

 Failure to refund application money

Under section 69(5), The directors of a company are jointly and severally liable to repay the
application money with interest, if the company fails to refund the application money of those
applicants who have not been allotted shares within 130 days from the date of issue of the
prospectus. However, this does not in any way affect the very existence of the company or
indeed its subsequent independent personality and other features.

 Misrepresentation in prospectus

In case of misrepresentation in a prospectus, every director, promoter and every other person,
who authorizes such issue of prospectus incurs liability towards those who subscribed for shares
on the faith of untrue statement. Besides, these persons may be charged criminally and fined upto
Rs. 50,000 or imprisoned upto two years or may be fined as well as imprisoned.8as per section 62 and
6.

 Holding Subsidiary companies

A holding company is required to disclose to its members the accounts of the subsidiaries. Every
holding company is supposed to attach to its balance sheet, copies of the balance sheet, profit and
loss account, directors report and auditors’ report etc. in respect of each subsidiary company as per
section 212. It amounts to lifting of the corporate veil because in the eyes of law a subsidiary
company is a separate legal entity and through this mechanism their identity is known.

 For facilitating the task of an inspector to investigate the affairs of the company

If it is necessary for the satisfactory completion of the task of an inspector appointed to investigate
the affairs of a company for alleged mismanagement, or oppressive policy towards its members, he

8
Ibid
 may investigate into the affairs of another related company in the same management or group. 9(
section 239)

 Liability of director 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. The act provides for a punishment
with fine which may extend to Rs. 50,000 in respect of each of those companies after the first twenty.
Further Section 299 provides that “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 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. Failure to comply with requirements of this Section will cause vacation of
the office of the Director and will also subject him to penalty
 Sections 307 and 308- Section 307 applies to every director and every deemed director. Not only the
name, description and amount of shareholding 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. Further
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.

Statutory provisions under the company Act 2013

 Failure to return application money (Section-39): In the case of issue of share by a

company, whether to the public or by way of rights if, minimum subscription as stated in the
prospectus has not been received directors shall be personally liable to return the money with
interest, in case application money is not repaid within a prescribed period.
 Misrepresentation in prospectus (Section- 34 and 35): In case of misrepresentation in
a prospectus, every director, promoter and every other person who authorize such issue of
prospectus incurs liability towards those who subscribed for shares on the faith of untrue
statement.

9
Principles of Company Law, Kailash Rai, Allahabad Law Agency 185