NAME : GEETIKA SINGH

SEC : B
ROLL NO : 147
COURSE : LLB
SEMESTER : 4TH

SUBMITTED TO:SHILPA MAM

Lifting Of Corporate Veil

Editor’s Note: The fundamental attribute of corporate personality, from which all other
consequences flow if that the corporation is a legal entity distinct from its members.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. It is one of the most widely used
doctrines to decide when a shareholder or shareholders will be held liable for obligations of the
corporation and continues to be the most litigated and most discussed doctrines in all of
corporate law. Therefore, a study of the same through the lens of leading case laws and
judgements as done by the authors would be highly beneficial.
“The company is at law a different person altogether from the subscribers to the Memorandum
and, although it may be that after incorporation the business is precisely the same as it was
before, and the same persons are managers, and the same hands receive the profits, the
company is not in law the agent of the subscribers or the trustee for them. Nor are subscribers as
members liable, in any shape or form, except to the extent and in the manner provided by the
Act.”
-Lord McNaughten-

Introduction
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.

But for clarity as to ‘Lifting of the Corporate Veil’, an understanding of the corporate personality
of a company is required, along with study of the provisions of Indian law that pave the way for
courts to pierce the corporate veil. In this project, we have attempted to study and analyze the
concept of separate legal entity, the various grounds for piercing of the corporate veil and
elements of lifting of corporate veil analyzed through the lens of leading case laws and
judgements.

SOME OF THE LEADING CASES Soloman

v. Soloman and Co.,(1897) A.C 22 (H.L)
The law laid down in Soloman v. Soloman and Co.(supra) is often considered the source on the basis
of which the jurisprudence of corporate personality has been written world over. However, the
history of corporate-commercial litigation has witnessed situations wherein the Courts have gone
beyond the corporate cloak and analyzed the working and the motives of the members or directors
of the company: In doing the same, the Courts have evolved the concept of lifting or piercing the
corporate veil. This article aims to bring to light the interpretational issues concerning taxation
cases vis-à-vis the aforesaid doctrine and to focus on interpretation of the Indian Courts over time.
In recent times the plague of tax evasion has been so severe that the Courts have actively used the
doctrine of piercing of corporate veil to probe into transactions and decide the actual entities
responsible behind the facade of the company. Lately, the Hon’ble Karnataka High Court in the case
of Richter Holding v. The Assistant Director of Income Tax 1used this doctrine to take the view that
it may be necessary for the fact finding authority to lift the corporate veil to look into the real
nature of the transaction and ascertain the virtual facts. The Hon’ble High Court further held that
the Assessee, as a majority share holder, enjoys the power by way of interest and capital gains in
the assets of the company and it is necessary to identify whether the transfer of shares includes
indirect transfer of assets and interest in the company.

1
Writ Petition No. 7716/2011 decided on 24.03.2011
In view of the aforementioned rulings, it is eminently clear that the Indian Courts are actively
pursuing this doctrine to ascertain the actual offenders and the nature of transactions behind the
veil of the company. In Juggilal Kamlapat v. Commissioner of Income Tax, Uttar Pradesh22 (SC Full
Bench), the Hon’ble Supreme Court had taken the view that the doctrine of lifting the corporate veil
ought to be applied only in exceptional circumstances and not as a routine matter. However, if the
intention of the Assessee is to avoid tax through a collusive device, and the real purpose was
something else than what appeared on the face, then the Court may lift the veil of corporate entity
to pay due regard to the economic realities behind the legal facade.
The above analysis shows that in the initial years the Courts have taken a balanced approach while
using the doctrine and have time and again stated that the doctrine must be used in exceptional
cases and must not be used as a tool to fasten liability on the entities behind the corporate curtain.
With every passing year we see that this doctrine is being used more extensively than the previous
years. This comes especially in the light of the fact that India is witnessing a corporate transition and
issues pertaining to tax evasion, liquidation and subsidiary conglomerates are surfacing at an ever
increasing rate. The key question that needs to be understood is to what extent should this doctrine
be used; should it be used only in exceptional circumstances as it has put forth by the founding legal
luminaries or should it be given a dynamic and versatile approach and be used as extensively as
possible.
Reinforcing the Identity of the Company, as Distinguishable
From the Director
The doctrine seems to be in vogue! As ‘Scams’ is the new word on the block, whether it be Satyam’s
Ramalinga Raju or the band wagon locked in Tihar Jail for the 2G Scam, it is the application of the
niceties of the doctrine that has revealed the true culprit behind the actions of the company. The
aim of the doctrine is to ensure that the players behind the corporate veil maintain the sanctity of
the company’s affairs and do not malign the same by injecting personal motive. Nevertheless, a
situation may warrant that the legal identity of the company as a juristic person be seen in
distinguishment with the identity of the person causing the tax evasion, fraud, etc.
Take the example of loss caused to a company by embezzlement, something engineered and
tailored on the lines of the Satyam case, where a Managing Director (or an agent/employee) of a
company, along with his confidants occupying top positions, are involved in defrauding a company
of its funds and business opportunities. The Courts in this regard have opined that the loss be
allowed as a deduction under the provisions of the Income Tax Act, 1961. The relevance of the
example in terms of the present article is to give the doctrine of corporate veil a new facet.
In the case of Badridas Daga v. CIT 3the Hon’ble Supreme Court held that a loss caused by
embezzlement is allowable as a deduction where it is shown that the loss has occurred in the
course of the business and is incidental to it. Another pre-condition to be established is that the
‘company’ has to be unaware of the embezzlement. Further, through a plethora of decisions4 .

2
Writ Petition No. 7716/2011 decided on 24.03.2011

3
1958] 34 ITR 10 (SC)
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. In other words, it has a “legal personality” and is often described as an artificial person
in contrast with a human being, a natural person.[i] For centuries, there was a heated controversy
over the applicability of the doctrine of separate legal entity and further to limit the theory of
limited liability which is often metaphorically termed as “lifting the corporate veil”.[ii] It has also
been defined as “piercing the corporate veil: the judicial act of imposing liability on otherwise
immune corporate officers, directors, and shareholders for the corporation’s wrongful acts.”[iii]

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.[iv] at
the end of the nineteenth century 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 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. In
these circumstances, Vaughan Williams J. and a strong 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.

As most of the provisions of Indian Law were borrowed from the English Law, it more or less
resembles the English Law. Solomon’s case has been the authority ever since in the decisions of
the doctrine in Indian company cases.

Likewise, in Macaura v. Northern Assurance Co. Ltd.[v] the House of Lords decided that insurers
were not liable under a contract of insurance on property that was insured by the plaintiff but
owned by a company in which the plaintiff held all the fully-paid shares. The House of Lords held
that only the company as the separate legal owner of the property, and not the plaintiff, had the
required insurable interest. The plaintiff, being a shareholder, did not have any legal or beneficial
interest in that property merely because of his shareholding. Support for the doctrine has been
exhibited more recently in Lee v. Lee’s Air Farming[vi]. The Privy Council held that Lee, as a
separate and distinct entity from the company which he controlled, could be an employee of that
company so that Lee’s wife could claim workers’ compensation following her husband’s death.

The Supreme Court in Tata Engineering Locomotive Co. Ltd v. State of Bihar & Ors.[vii] 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 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.” In some of the cases, judicial
decisions have no doubt lifted the veil. Gower has summarized the position with the observation
that in a number of cases the legislature has rented in many respects, the veil woven by
Solomon’s case. According to Gower, the courts have only construed the statutes as “cracking
open the corporate shell” when compelled to do so by the clear words of the statute. 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

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.[viii]

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
[ix]

the corporation is liable to discharge the obligations ignoring the concept of corporation as a
separate entity. Generally, an incorporated company is liable as a juristic person. It is different
from its shareholders and Board of directors of Company. The acts of malfeasance and
misfeasance and acts of misdemeanor by the shareholders and directors of a corporation
(company), do not always bind the company as such. However so as to apply law to ascertained
facts, judicial process can ignore juristic personality of the company and haul-up the directors
and in certain cases even shareholders to discharge the legal obligations. When the corporate
veil is lifted/pierced, it only means that the Court is assuming that the corporate entity of a
concern is a sham to perpetuate the fraud, to avoid liability, to avoid effect of statute and to
avoid obligations under a contract.[x]

In Skipper Construction Company (Private) Ltd. , the Supreme Court referred to the principle of
[xi]

lifting corporate veil. After referring Palmer’s Company Law as well as Modern Company Law by
Gower, it was observed as under:-

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.

In LIC of India v. Escorts Ltd.[xii], Justice O.Chinnapa Reddy had stressed that the corporate veil
should be lifted where the associated companies are inextricably connected as to be in reality,
part of one concern. After the Bhopal Gas leak disaster case, the lifting of corporate veil has been
escalated. Furthermore in State of UP v. Renusagar Power Company[xiii], the Supreme court
lifted the veil and held that Hindalco, the holding company and its subsidiary, Renusagar
company should be treated as one concern and that the Power Plant of Renusagar must be
treated as the own source of generation of Hindalco and on that basis, Hindalco would be liable
to pay the electric duty. After the decision in Renusagar case, the doctrine has been considered
in several other cases.

In Trustor AB v. Smallbone (No.2)(2001)[xiv], the Vice-Chancellor concluded; “Companies are

often involved in improprieties. Indeed there was some suggestion to that effect in Solomon. But
it would make undue roads into the principle of Solomon if an impropriety not linked to the use
of the company structure to avoid or conceal the liability of it if the company was used as a device
or facade to conceal the true facts thereby avoiding or concealing any liability of those
individuals.”

Just as in the case of Jones v. Lipman[xv] the corporation must be the device through which the
impropriety is conducted, impropriety alone will not suffice.

The Grounds for Lifting of Corporate Veil

As early as Solomon, judgments have indicated possible exceptions to the separate entity
concept. Lord Halsbury recognised the separate entity providing there was “no fraud and no
agency and if the company was a real one and not a fiction or myth.” As noted by Lord Denning
in Littlewoods Mail Order Stores Ltd. v. IRC,[xvi] “cast a veil over the personality of a limited
company through which the courts cannot see. The courts can, and often do, pull off the mask.
They look to see what really lies behind.”

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

(a) 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.

 Fraudulent conduct

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.[xvii]

 Failure to refund application money

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.[xviii] 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.[xix] 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.[xx]

 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.[xxi] 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 may investigate into the affairs of another related company in the same
management or group.[xxii]

 For investigation of ownership

The Central Government may appoint one or more inspectors to investigate and report on the
membership of any company for the purpose of determining the true persons who are financially
interested in the company and who control its policy or materially influence it.

 Liability for ultra vires acts

Directors and other officers of a company will be personally liable for all those acts which they
have done on behalf of a company if the same are ultra vires the company.

(b) Under judicial interpretations

 Protection of revenue

In Sir Dinsaw Maneckjee Petit, the assessee was a millionaire earning a huge income by way of
dividend and interest. He formed four private companies and transferred his investments to each
of these companies in exchange for their shares. The dividends and interest income received by
the company was handed back to Sir Dinshaw as a pretend loan. It was held that the company
was formed by the assessee purely as a means of avoiding tax and companies thus formed were
nothing more than the assesee himself. It did no business and was created as a legal entity simply
to extend pretend loans to Sir Dinshaw. In the case of CIT v. Sri Meenakshi Mills Ltd.,[xxiii] where
the veil had been used as means of tax evasion, the court upheld the piercing of the veil to look
at the real transaction.
  Prevention of fraud or improper conduct

Where the medium of a company has been used for committing fraud or improper conduct,
courts have lifted the veil and looked at the reality of the situation. The two classic cases of the
fraud exception are Gilford Motor Company Ltd v. Horne and Jones v. Lipman. In the first case,
[xxiv]

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. 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. Russel 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.

 Determination of the enemy character of a company

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 Co. Ltd. v. Continental Tyre and Rubber Co.,[xxv] where a
company was incorporated in London for the purpose of selling German tyres manufactured by
a German company. Its majority shareholders and all its directors were German. The English
Courts held it to be an enemy company on lifting the veil and trading with this company was held
to amount to trading with the enemy.

 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 London Borough Council[xxvi] it has been said
that the courts may disregard Solomon’s case whenever it is just and equitable to do so. 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”. The nature of shareholding and control would be indicators
whether the court would pierce the corporate veil. 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 facade concealing the true
facts” In the figurative sense facade 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 facade 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 a 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.

 Where a company acts as an agent for its shareholders

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 R.G. Films
Ltd.[xxvii], 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.

 In case of economic offences

In Santanu Ray v. Union of India,[xxviii]it was held that in case of economic offences, a court is
entitled to lift the veil and pay regard to the economic realities behind the legal façade.

 Where Company is a sham or cloak

When the court finds that company is a mere cloak or sham and is used for some illegal or
improper purpose, it may lift veil. In the leading case of P.N.B. Finance v. Shital Prasad[xxix],
where a person borrowed money from a company and invested it into three different companies,
the lending company was advised to bring together the assets of all the three companies, as they
were created to do fraud with the lending company. The meaning of a “sham‟ was defined by
Diplock LJ in Snook v London and West Riding Investments Ltd.[xxx], thus: “it means acts done
or documents executed by the parties to the “sham” which are intended by them to give to third
parties or to the court the appearance of creating between the parties legal rights and obligations
different from the actual legal rights and obligation (if any) which the parties intend to
create….but…for acts or documents to be a „sham‟, with whatever legal consequences follow
from this, all the parties thereto must have a common intention that the acts or documents are
not to create the legal rights and obligations which they give the appearance of creating…‟
Elements of a piercing claim
 Control and domination

Control and determination part of the test determines the relationship between the shareholder
and the corporation. Generally, mere majority stock ownership will be insufficient to satisfy this
element. Instead, one must show “complete domination, not only of finances, but of policy and
business practice in respect to the transaction attacked so that the corporate entity as to this
transaction has no separate mind, will or existence of its own.” To determine the existence of
“complete domination”, courts usually require the plaintiff to produce evidence of inadequate
capitalization or undercapitalization, failure to follow corporate formalities, commingling of
funds, diversion of funds or assets for non-corporate purposes.[xxxi]

 Improper purpose or use

This test requires the plaintiff to show that the control exercised by the parent company or
dominant stockholder was “used by the defendant to commit fraud or wrong, to perpetrate the
violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention
of plaintiff’s legal right.” This inquiry focuses on the relationship between the plaintiff and the
corporation. It is an explicit recognition that some improper conduct must have occurred,
establishing that the corporation was controlled and dominated.[xxxii]

 Resulting damage or harm

In this test the plaintiff must show that the defendant’s control, exerted in a fraudulent, illegal or
otherwise unfair manner toward it, caused the harm suffered. In other words, the plaintiff must
prove that, unless the corporate veil is pierced, it will have been treated unjustly by the
defendant’s exercise of control and improper use of the corporate form and, thereby, suffer
damages.[xxxiii]

Prosecution of Corporate Entities

Corporations play a significant role not only in creating and managing business but also in
common lives of most people. That is why most modern criminal law systems foresee the
possibility to hold the corporation criminally liable for the perpetration of a criminal offence. The
doctrine of corporate criminal liability turned from its infancy to almost a prevailing rule. [xxxiv]

In India, the need for industrial development has led to the establishment of a number of plants
and factories by the domestic companies and under-takings as well as by Transnational
Corporations. Many of these industries are engaged in hazardous or inherently dangerous
activities which pose potential threat to life, health and safety of persons working in the factory,
or residing in the surrounding areas. Though working of such factories and plants is regulated by
a 614 number of laws of our country, there is no special legislation providing for compensation
and damages to outsiders who may suffer on account of any industrial accident. [xxxv]

Criminal Liability of Corporations: Pre-Standard Chartered Bank Case Law

Earlier, Indian courts were of the opinion that corporations could not be criminally prosecuted
for offenses requiring mens rea as they could not possess the requisite mens rea. Mens rea is an
essential element for majority, if not all, of offenses that would entail imprisonment or other
penalty for its violation. Indian courts held that corporations could not be prosecuted for offenses
requiring a mandatory punishment of imprisonment, as they could not be imprisoned.

In A. K. Khosla v. S. Venkatesan , two corporations were charged with having committed fraud
[xxxvi]

under the IPC. The Magistrate issued process against the corporations. The Court in this case
pointed out that there were two pre-requisites for the prosecution of corporate bodies, the first
being that of mens rea and the other being the ability to impose the mandatory sentence of
imprisonment. A corporate body could not be said to have the necessary mens rea , nor can it be
sentenced to imprisonment as it has no physical body.

In Kalpanath Rai v State (Through CBI) , a company accused and arraigned under the Terrorists
[xxxvii]

and Disruptive Activities Prevention (TADA) Act, was alleged to have harbored terrorists. The trial
court convicted the company of the offense punishable under section 3(4) of the TADA Act. On
appeal, the Indian Supreme Court referred to the definition of the word “harbor” as provided in
Section 52A of the IPC and pointed out that there was nothing in TADA, either express or implied,
to indicate that the mens rea element had been excluded from the offense under Section 3(4) of
TADA Act.

There is uncertainty over whether a company can be convicted for an offence where the
punishment prescribed by the statute is imprisonment and fine. This controversy was first
addressed in MV Javali v. Mahajan Borewell & Co and Ors where the Supreme Court held that
[xxxviii]

mandatory sentence of imprisonment and fine is to be imposed where it can be imposed, but
where it cannot be imposed ,namely on a company then fine will be the only punishment.

In Zee Tele films Ltd. v. Sahara India Co. Corp. Ltd , the court dismissed a complaint filed against
[xxxix]

Zee under Section 500 of the IPC. The complaint alleged that Zee had telecasted a program based
on falsehood and thereby defamed Sahara India. The court held that mens rea was one of the
essential elements of the offense of criminal defamation and that a company could not have the
requisite mens rea. In another case, Motorola Inc. v. Union of India , the Bombay High Court
[xl]

quashed a proceeding against a corporation for alleged cheating, as it came to the conclusion
that it was impossible for a corporation to form the requisite mens rea, which was the essential
ingredient of the offense. Thus, the corporation could not be prosecuted under section 420 of
the IPC.

Standard Chartered Bank Case Law

This is the landmark case in which the apex court overruled the all other laid down principles. In
this case, Standard Chartered Bank was being prosecuted for violation of certain provisions of
the Foreign Exchange Regulation Act, 1973. Ultimately, the Supreme Court held that the
corporation could be prosecuted and punished, with fines, regardless of the mandatory
punishment required under the respective statute.

The Court did not go by the literal and strict interpretation rule required to be done for the penal
statutes and went on to provide complete justice thereby imposing fine on the corporate. The
Court looked into the interpretation rule that that all penal statutes are to be strictly construed
in the sense that the Court must see that the thing charged as an offence is within the plain
meaning of the words used and must not strain the words on any notion that there has been a
slip that the thing is so clearly within the mischief that it must have been intended to be included
and would have included if thought of. [xli]

Justice Paranjape had stated :

[xlii]

“the question whether a corporate body should or should not be liable for criminal action
resulting from the acts of some individual must depend on the nature of the offence disclosed by
the allegations in the complaint or in the charge-sheet, the relative position of the officer or
agent, vis-a-vis, the corporate body and the other relevant facts and circumstances which could
show that the corporate body, as such, meant or intended to commit that act…”

The Supreme Court also pointed out that, as to criminal liability, the FERA statute does not make
any distinction between a natural person and corporations. Further, the Indian Criminal
Procedure Code, dealing with trial of offenses, contains no provision for the exemption of
corporations from prosecution when it is difficult to sentence them according to a statute. The
court held that the FERA statute was clear: corporations are vulnerable to criminal prosecution,
and allowing corporations to escape liability based on the difficulty in sentencing would do
violence to the statute. The Court did not develop its reasoning far enough so as to specifically
hold that a corporation is capable of forming mens rea and acting pursuant to it. However, the
Court held that corporations are liable for criminal offenses and can be prosecuted and punished,
at least with fines. Many of the offenses, punishable by fines, however do have mens rea as a
necessary element of the offense. By implication, it can be said that post Standard Chartered
decision, corporations are capable of possessing the requisite mens rea. As in prosecution of
other economic crimes, intention could very well be imputed to a corporation and may be
gathered from the acts and/or omissions of a corporation.

Criminal Liability of Corporations: Post-Standard Chartered Bank Case Law

There is no immunity to companies from prosecution merely because the prosecution is in

respect of offences for which punishment prescribed is mandatory imprisonment. In Iridium India
Telecom Ltd. v. Motorola Incorporated and Ors. , the apex court held that a corporation is
[xliii]

virtually in the same position as any individual and may be convicted under common law as well
as statutory offences including those requiring mens rea. The criminal liability of a corporation
would arise when an offence is committed in relation to the business of the corporation by a
person or body of persons in control of its affairs and relied on the ratio in Standard Chartered
Bank Case.

The apex court held that corporations can no longer claim immunity from criminal prosecution
on the grounds that they are incapable of possessing the necessary mens rea for the commission
of criminal offences. The notion that a corporation cannot be held liable for the commission of a
crime had been rejected by adopting the doctrine of attribution and imputation . [xliv]

In another judgment in July 2011 of CBI v. M/s Blue-Sky Tie-up Ltd and Ors , the apex court
[xlv]

reiterated the position of law held that companies are liable to be prosecuted for criminal
offences and fines may be imposed on the companies.

International Scenario
 Germany

A basic principle of German law is societas delinquere non potest, which means that a corporate
body cannot be liable for a criminal offence. The argument is that the human element is missing
and that the creation and operation of slush funds, as well as giving bribes, are all human acts
and not the acts of the company itself. But Germany has developed an elaborate structure of
[xlvi]

administrative sanctions, which includes provisions on corporate criminal liability. These so-
called Ordnungswidrigkeiten are handed down by administrative bodies. The key provision for
sanctioning the corporation is Section 30 Ordnungswidrigkeitengesetz, which calls for the
imposition of fines on corporate entities. [xlvii]

 Australia

The criminal sanctions are quite high and criminal liability of a company is recognized by the
Australian Legislation . Moreover, the Australian legislature has introduced criminal liability of
[xlviii]

directors.

 United States and United Kingdom

For more than fifty years, most criminal law and corporate scholars in the United States have
been opposed to corporate criminal liability, arguing that it should be eliminated or at least
strictly limited . In the US and the UK, it has been a settled principle that corporates can be held
[xlix]

criminally liable.

 France
France had also not recognized corporate criminal liability since the French Revolution, the new
Code Pénal of 1992 makes specific mention of this concept in section 121(2). The resistance to
not including corporate criminal liability in the criminal code had increased over the years, and
in 1982 the “Conseil Constitutionnel” had made it clear that the French Constitution did not
prohibit the imposition of fines on a corporation. [l]

 International Conferences

The Concept of Criminal liability of Corporation is also mentioned under various International
documents. A number of conferences have dealt with the same issues since the end of World
War II. Among them are the 8th International Conference of the Society for the Reform of
Criminal Law in 1994 in Hong Kong and the International Meeting of Experts on the Use of
Criminal Sanctions in the Protection of the Environment in Portland, in 1994. [li]

The Seventh United Nations Congress on the Prevention of Crime and the Treatment of Offenders
of 1985 in Milan mentioned that “due consideration should be given by Member States to making
criminally responsible not only those persons who have acted on behalf of an institution,
corporation or enterprise, or who are in a policy-making or executive capacity, but also the
institution, corporation or enterprise itself, by devising appropriate measures that could prevent
or sanction the furtherance of criminal activities. ”
[lii]

In 1998, the Council of Europe passed the Convention on the Protection of the Environment
through Criminal Law, which stipulated in Article 9 that either “criminal or administrative,
sanctions or measures” could be taken in order to hold corporate entities accountable. [liii]

Lifting the Corporate Veil in Taxation

matters
The doctrine of piercing or lifting of the veil of a Corporate Personality makes a change in the
attitude of law as originally adopted towards the concept of separate legal personality or entity
of the corporation. In Ansuman Singh v. State of U.P. , the court held that in suitable cases, the
[liv]

court will lift the corporate veil.

It may happen that the corporate personality of the company is used to commit frauds or
improper or illegal acts like tax evasion. Thus, the concept of piercing or lifting the corporate veil
holds significance. A corporate veil may be pierced either through statutory provisions or by
judicial interpretation. Piercing the corporate veil in taxation matters is an outcome of judicial
decisions. The court has the power to disregard the corporate entity if used for tax evasion or to
circumvent tax obligation. [lv]
The veil has also been lifted after finding that a corporation is merely an adjunct, business conduit
or alter ego of another corporation or person. When the veil is pierced, the other entity, or the
directors, officers, stockholders or members of the corporation, could be held solitarily and
personally liable for corporate obligations. [lvi]

Piercing the Veil: Indian Context

When any private company is wound up any tax assessed on the company whether before or in
course of liquidation, in respect 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 be liable for payment of tax.

A company transferred its business to another company which was not taxable, but the company
was carrying on some other business which was taxable. The company remained liable to pay the
tax applicable to such business and lifting of Corporate Veil was permitted even in the absence
of any statutory provision in this regard. [lvii]

In the case of Richer Holding Ltd. (RHL) , the issue before the High Court was whether RHL was
[lviii]

obliged to withhold tax on the consideration paid for acquisition of 60% of the shares in a UK
company that held a majority stake in an Indian Company. The High Court rejected the petition
filed by RHL against the show cause notice by the Tax Authority since it was premature it was
premature at this stage to arrive at a conclusion that there is no avoidance of tax obligations and
RHL was not liable to tax on capital gains. The High Court also observed that it may be necessary
for the Tax Authority to lift the Corporate Veil as well as examine the extent of powers the
majority shareholder had in the interest/assets of the Indian Company to look into the real nature
of the transaction.

In Vodafone International Holdings BV v. UOI Hutchinson International (non-resident company)

[lix]

held 100% shares of CGP Investments Holdings Ltd. (non-resident company) which in turn held
67% shares in the Indian company Hutchinson-Essar. The question which arose was, whether the
income accruing to Hutchinson as a result of the transaction could be deemed to accrue or arise
in India by virtue of Sec. 9 of the Income Tax Act. In Vodafone, the High Court answered all issues
against Vodafone. However, final and concrete conclusions cannot be drawn as the judgment
was not dealing with the taxability of the transaction.

In Santanu Ray v. UOI , it was held that in case of economic offences the court is entitled to lift
[lx]

the corporate veil and pay regard to the economic realities behind the legal façade. The court
held that the veil of corporate entity could be lifted by the adjudicating authorities so as to
determine as to which of the directors were concerned with the evasion of excise duty by reason
of fraud, concealment or wilful misstatement or contravention of the provisions of the Act.

Piercing the Veil: International Context

A corporation is a separate entity from its shareholders and is subject to taxation separate and
apart from its shareholders. Similarly, separate corporations are generally treated as separate
[lxi]

entities for tax purposes, no matter how closely they may be affiliated, as in the case of a parent
and wholly owned subsidiary. Only in exceptional circumstances will courts ignore the separate
[lxii]

existence of Corporations. [lxiii]

If a corporation was formed for a valid business reason or conducted substantial business
activities after its formation, it will be recognized for tax purposes. While the Supreme Court
[lxiv]

has intimated that and otherwise separate taxable corporate entity may, in some circumstances,
qualify as a non taxable agent of a principal, two perquisites must be satisfied: relations with
[lxv]

the corporation`s principal must not be dependent on the fact that it is owned by the principal,
and its business purpose must be carried on of normal duties of an agent. Where a corporation
[lxvi]

qualifies as a non-taxable agent, shareholders may be entitled to deduct loses sustained in

transaction engaged in through the agent. [lxvii]

In the Menguito case, the Supreme Court stated that it considers the following as substantial
[lxviii]

evidence that two entities are actually one juridical taxable person:

 When the owner of one directs and controls the operations of the other, and the
payments effected or received by one are for the accounts due from or payable to the
other; or
 When the properties or products of one are all sold to the other, which, in turn,
immediately sells them to the public.

In this case, the sole proprietor was held liable for tax liabilities of the corporation after finding
overwhelming evidence supporting the piercing of the corporate veil. Such evidence consists of
several admissions by the sole proprietor and his wife, and documents presented in evidence
showing that the identities of the sole proprietorship and the corporation are interchangeable.

It is also worth noting that corporate fiction is pierced not only on the basis of fraud but also in
alter-ego cases where a dummy corporation serves no business purpose other than as a blind. In
at least two cases, the Supreme Court disregarded the veils of corporate fiction after finding that
while the organization of a separate corporation was not to perpetuate fraud, the clear intention
was to minimize taxes.

Whether or not a corporation a separate entity form the individual who created the corporation
is not the same question as whether it was an alter ego for the purpose of piercing the corporate
veil and holding the individual liable for its taxes; and a finding of separate taxable entity does
not preclude personal assessment against the individual. [lxix]

A corporation is subject to federal corporate income tax liability as long as it continues to do

business in the corporate manner, despite the fact that its recognized legal status under state
law is voluntarily or involuntarily terminated; and a valid corporation will be disregarded for
[lxx]
federal tax purposes only after the state has revoked its charter. A liquidating corporation
[lxxi]

continues its federal tax existence so long as it retains valuable assets.

Conclusion
The doctrine of piercing the corporate veil is not subject to any bright line tests. Courts have
struggled for years to develop and refine their analysis of these claims. However, each new action
brings a different set of facts and circumstances into the equation and a separate determination
must be made as to whether the plaintiff has adduced sufficient evidence of control and
domination, improper purpose, or use and resulting damage. The decision whether to pierce the
corporate veil may be assisted, at least in part, upon the opinion of qualified experts. In particular,
expert testimony would be helpful to the trier of fact in determining whether the corporation
has been adequately capitalized for its intended purpose. Ultimately, however, the judgment
whether to disregard the corporate entity will be based upon a balancing of various factors all or
some of which are necessary but may not be sufficient to pierce the veil.

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.