LIFTING OF

CORPORATE VEIL
INTRODUCTION
 A Company is an artificial person having separate
legal entity, distinct from its members.
 The principle of separate entity is regarded as a
curtain, a veil, or shield between the company and its
members, thus protecting them from the liability of
the company.
 However, when this principle is used to defraud the
public, the concept of lifting of corporate veil comes in
to existence.
 An artificial person is not capable of doing anything
illegal or fraudulent, the notion of corporate
personality might have to be abandoned to identify
the person who are really guilty.
 This is known as lifting of corporate veil.
CIRCUMSTANCES UNDER WHICH COURT
MAY LIFT THE CORPORATE VEIL

 The circumstances may be discussed under the

following two heads:

Common Law Exceptions.

Statutory Exceptions
COMMON LAW EXCEPTIONS
(JUDICIAL INTERPRETATIONS)
1. Determination of enemy
character:
A company will be of enemy
character when person s in
effective control of its affairs
are resident in any enemy
country or wherever residents
are acting under the direction
and control of enemies.
CASE LAW: DAILMER CO LTD VS.
CONTINENTAL TYRES & RUBBER CO LTD.
 A Germany based company was incorporated in
England to sell tyres manufactures in Germany.
The German company had however held the bulk of
shares in this English company.
 As World War I broke out, the English company
commenced an action to recover trade debt.
 The question was brought before House of Lords
which decided the case against the claimant, stating
that, company is not a real person but a legal entity,
it cannot be a friend or an enemy.
 However, it may assume an enemy character when
persons in de facto control of it’s affairs are residents
of the enemy territory.
 Thus, the claim was dismissed.
COMMON LAW EXCEPTIONS
(JUDICIAL INTERPRETATIONS)
2. Sham Companies:-
The Courts are also empowered to lift the
corporate veil if they are of the opinion that such
companies are sham or hoax i.e. Where the
device of incorporation is used for some
illegal or improper purpose. Such companies
are mere cloaks and their personalities can be
ignored in order to identify the real culprit
 COMMON LAW EXCEPTIONS
(JUDICIAL INTERPRETATIONS)
3. Prevention of fraud/
improper conduct:
It is obvious that no
company can commit
fraud on it’s own.
Human agency involved
commits such acts. In
such cases the court
may disregard the
separate existence of the
company.
GILFORD MOTOR CO. LTD V. HORNE(1933)
 Horne entered into an agreement with his employer company
that after the termination of the employment he would not
solicit his employer’s customers for a certain period of
time.
 Soon after the termination of his employment he formed a
company of which the two shareholders were his wife and
one another person.
 The company sent out circulars to customers of his former
employer.
 An injunction was granted against Horne and against the
company he has formed restraining them from soliciting
the plaintiff’s customers.
 The court held the company was mere cloak for the purpose
of enabling the defendant to commit a breach of his agreement
against solicitation.
COMMON LAW EXCEPTIONS
(JUDICIAL INTERPRETATIONS)
4. Agency companies:
where the company is acting as an agent of its
shareholder or of another company, it will held liable
for its act.
 Example : An English company was formed with a
capital of 100 in 1 shares, 90 of which were held by an
American the director of United States Film
Company, and 10 were held by another director, a
British subject.
 The company produced a film called ‘monsoon’ the
production of which was financed by the company.
 The court refused to agree that the film was made by
the British company, the company was merely the
nominee or agent of United States Film Company.
COMMON LAW EXCEPTIONS
(JUDICIAL INTERPRETATIONS)
5. Tax Evasion (Protection of revenue):
The courts may disregard the corporate entity of a
company where it is used for tax evasion.
Case Law: DinshawManeckjee Petit
 In this case, the founding person of 4 new private
companies, Sir Dinshaw, was enjoying huge dividend
and interest income, and in order to evade his tax, he
thus found 4 sham companies.
 His income was credited in the accounts of these
companies and these amounts were repaid to Sir
Dinshaw but in form of a pretended loan.
 These loans entitled him to have certain tax benefits.

 It was rather held that purpose of founding these new

companies was simple as means of avoiding super-
tax.
COMMON LAW EXCEPTIONS
(JUDICIAL INTERPRETATIONS)
6. Avoidance of welfare legislation:
Avoidance of welfare legislation is as common
as the avoidance of taxation.
 Example: A subsidiary was formed to split the
profits of the company so that the incidence of
bonus in the hands of the parent company will
be reduced.
 The supreme court disregard the existence of a
separate company for the purpose of working
out bonus for its employees.
COMMON LAW EXCEPTIONS
(JUDICIAL INTERPRETATIONS)
7. Punishment of
contempt of court:
Person responsible for
disobedience of court
can be punished, if
disobedience is done
by a company. Court
can lift the veil to find
the real offender.
COMMON LAW EXCEPTIONS
(JUDICIAL INTERPRETATIONS)
8. Ascertaining true nature of transaction if
alleged as sham:
Court will be justified in lifting the corporate
veil to ascertain the true nature of transaction
as to who are the real parties to sale and
whether it is genuine and bonafide.
9. Determination of technical competence of
company:
The Supreme Court in its recent decision held that
the experience of the promoters and directors is
the experience of the company.
COMMON LAW EXCEPTIONS
(JUDICIAL INTERPRETATIONS)
10. Formation of subsidiary company to act as
an agent:
The Supreme Court in his recent decision held
that where the holding company hold 100%
shares in a subsidiary company and latter is
created for the purpose of holding company,
corporate veil can be lifted.
STATUTORY EXCEPTIONS
MISSTATEMENT IN PROSPECTUS:
 Under Section 26 (9), Section 34 and Section 35 of
the Companies Act, it is a punishable offence to
furnish untrue or false statements in prospectus
of a company offering securities for sale.
 If any person attempts to furnish false or untrue
statements in prospectus, he is subject to penalty
or imprisonment or both, as prescribed under the
aforesaid sections.
MIS-DESCRIPTION OF COMPANY’S NAME:
 The name of the company is very important.
Attention should be paid to every detail in the
spelling and pronunciation of the name of
company.
 The name of the company requires prior approval
as under Section 4 and printed under Section 12
of the Companies Act.
 Thus, if any representative of the company collect
bills or sign on behalf of the company, and enter
in incorrect particulars of the company, then he
is personally liable.
FAILURE TO RETURN APPLICATION
MONEY:

 Under Section 39 (3) of the Companies Act, gives

provision against allotment of securities. If the
minimum stated amount has not yet been
subscribed within a period of thirty days and
the sum payable on application is not received
within 15 days from the closure of issue, then
the officers in default are fined with an amount of
one thousand rupees for each day till the time
the default continues or one lakh rupees,
whichever is less.
INVESTIGATION OF OWNERSHIP OF
COMPANY:

 Under Section 216 of the Act, the Central

Government has authority to appoint
inspectors to investigate and report matters
relating to the company, and its membership for
the purpose of determining the true persons
financially interested in the success or
failure of the company;
control or
to materially influence the policies of the
company.
FRAUDULENT CONDUCT
 Under Section 339 of the Act, in case of winding
up of the company, it is found that company’s
name was being used for carrying out a
fraudulent activity, the Court is empowered to
hold any such person be liable for such unlawful
activities, be it director, manager, or any other
officer of the company.
LIABILITY FOR ULTRA-VIRES ACTS:
 Every company is bound to perform in
compliance of it’s memorandum of association,
articles of association, and the Companies Act,
2013. Any action done outside purview of either
is said to be “ultra-vires” or improper or beyond
the legitimate scope.
 Every person will be personally liable for all
those acts which have done on the behalf of the
company.
THANK YOU