East West University

Department of LAW
Spring 2024
Assignment

Title: (Lifting the corporate veil)

Submitted by:
Team : Cosmos
Name: MD. Sazidul Haque /ID: 2022-1-66-028
Din Mohammad Rodro/2022-1-66-037
Khandaker Shahla Tasnim/2022-1-66-038
Name: Mim Tasina Prapti /Id: 2022-1-66-039
Umme kulsum Jim /2020-3-66-016
Protyasha Kamal Prima/Id: 2022-1-66-012

Submitted to:
Course Instructor: Dr. Md. Mehedi Hasan
Course : Company law, sec:2
 Date: 10.06.2024
Lifting the Corporate Veil.

1. Introduction

The concept of limited liability is a fundamental principle in company law. It shields

shareholders from personal liability for the company's debts, limiting their financial risk to the
amount of their investment. This separation between the company and its owners is often
referred to as the corporate veil. However, this limited liability is not absolute. In certain
circumstances, courts can pierce the corporate veil and hold shareholders personally liable for the
company's actions. This essay will explore the concept of lifting the corporate veil, analyze its
justifications, and examine the case for fraud as a recognized exception.

Definition of Lifting the Corporate Veil:

The way of creating and incorporating a company is a step-by-step process for which each and
every member my follow some requirements given in the Companies Act, 1994. But after
corporation if there is any problem or lacking in the company or in any members of it, a suit can
be filed to seek whether there is any actual flaw or not. The process to do so is known as the
doctrine of ‘Lifting the Corporate Veil’.

To define the doctrine, “the possibility the look behind the company framework or behind the
companies separate personality to make the members liable, is knows as lifting the corporate veil
or piercing the corporate veil”. Generally, the members of the company are not liable to
outsiders. They are only liable to pay the company what they agreed upon to pay by the way of
share purchase price or guarantee. So, this doctrine is practiced to make the members liable, as
an exception to the rule. It is to break their shield of corporate shell.

3. Main Argument

The primary purpose of lifting the corporate veil is to prevent abuse of the limited liability
privilege. Courts can pierce the veil when the company's form is used to:

 Evade legal obligations: The corporate veil can be lifted when a company is set up with
the sole intention of evading legal obligations. This is often seen in cases where assets are
transferred from one company to another, both controlled by the same shareholders, to
avoid paying creditors. This is not only unethical but also illegal. Courts will often
intervene in such cases to ensure that justice is served and creditors receive their due.
This is done to maintain the integrity of the business environment and to discourage the
misuse of the corporate form for personal gain.
1

1
See [Lifting of the Corporate Veil-A reassessment of the fraud.pdf
  Commit fraud: If a company is used as a facade to perpetrate a fraudulent scheme, the
corporate veil can be pierced. This could involve activities such as money laundering, tax
evasion, or other fraudulent activities. In such cases, the individuals behind the company
cannot hide behind the corporate identity to escape liability. The courts will look beyond
the company to the individuals controlling it and hold them accountable for their actions.
This serves as a deterrent for individuals who might be tempted to use the corporate form
for fraudulent purposes.2
 Act against public interest: In exceptional cases, courts may disregard the corporate
veil to prevent companies from acting in a way that is harmful to the public good. This
could involve situations where a company is causing environmental harm, exploiting
workers, or engaging in anti-competitive practices. In such cases, the courts can step in to
ensure that the company and its controllers are held accountable for their actions. This is
done to protect the public interest and to ensure that companies cannot use their corporate
status as a shield against liability for their harmful actions. 3

In all these scenarios, lifting the corporate veil serves as a mechanism to ensure
accountability and justice. It prevents the misuse of the corporate form and maintains trust in
the corporate system. However, it’s important to note that these are exceptional
circumstances. The principle of limited liability, which protects shareholders from being
personally liable for the company’s debts, is a fundamental aspect of corporate law. Piercing
the corporate veil is not done lightly and is only used in cases where there is clear evidence
of wrongdoing.

Supporting Evidence Analysis with cases

The doctrine of lifting the corporate veil constitutes an exception to the concept of corporate
legal personality, but the exception and appropriate circumstances depend on the case law
and legal jurisprudence. Previously lifting the corporate veil is not legal. Also, there is no
guidance regarding the corporate veil. Also, the United Kingdom and other jurisdictions did
not give any clear guidelines. Recently UK Supreme Court gave a landmark decision and
established a principle by a case called Prest v Petrodel Resources Ltd.4

Now regarding lifting the corporate veil, there are lots of principles which is established my
many cases. A leading principle was established by the case Saloman vs Saloman and Others
Company Ltd5. Where Mr Saloman has a boot business. But his child advised him to open a
company. So they opened a company and Mr Saloman transferred his business to the
company for $40000. But the company paid $30000 and gave a $10000 secured debenture.

2
Salomon v Salomon [1897] AC 22.

3
See [Lifting of the Corporate Veil-A reassessment of the fraud.pdf]

4
Prest v Petrodel Resources Ltd
5
Saloman vs Saloman and Others Company Ltd
 After a few times later the company became liquidated. Here Unsecured creditors told that
the company is an agent of Mr Saloman. So Mr Saloman sued to recover his money as a
secured creditor. But the Lower court gave a decree that Mr Saloman and Saloman and other
companies Ltd are not separate entities they are the same person. Mr Salomon appealed.
House of Lords asked that when the company was established all the requirements to
incorporate a company were fulfilled or not. It was proof that the company fulfilled all the
requirements like seven members are there the company has three directors, shares are
distributed, the company has a business also registration was completed. House of Lords set
up a principle which is subscribers of the memorandum and the company is a separate entity.
Both are not the same. So as a secured creditor company had to pay Mr. Saloman at first.

Another principle was established by the case Royal British vs Tunquand6. Here director
takes the loan. In the memorandum of the association, it was clearly established company can
take a loan through the bond. But at first, it should to raised at a general meeting and pass the
resolution. The company is liable for this loan. How plaintiff know whether this loan is taken
by resolution or not because the plaintiff is not a member of the company? And plaintiff
assumed the resolution was passed. If the indoor management checks every single issue then
the company will not run smoothly. If anything goes against the memorandum of the
association then it will become ultra vires. There are also some exceptions. If the knowledge
of unregulated then the protection of indoor management does not work. Like, As you know
for a valid transfer, two directors' signatures must be there. If you accept then all the liability
is yours. Relevant case Devi Ditta Mal vs Standard Bank India (1927 101IC 568).
Suspiciously unregulated protection also does not work. You are dealing with someone who
does not have authority. Then if any problem arises then all the liability is yours.

Case Lee vs Lee’s Air Farming Ltd7 1960, In this case where a widow sued for claiming
2430 euros for herself and for her tour children and for funeral expenses. The widow sued
under the Worker’s compensation Act 1922. In five march 1956, the Plaintiff's husband died
in an aircraft accident. Plaintiff claims that when her husband died that time he was a worker
of that company. So under the Worker’s Compensation Act 1922, a company is bound to
give compensation. Respondent said that during the accident he was not only a worker but
also held two positions one is a Controlling shareholder and the second position is the
Governing Director. The company said he was not a worker during his death. In 1954 the
company was incorporated. The object of the company is the delivery of products by aircraft.
Registered capital was $3000. The company needed a pilot so the company appointed a
person for $1500 in an annual. Also, he is a governing director, who has all power. If Lee
appoints or assigns himself be use his power then it will be fraud. But if the company assigns
him then it will be okay. Court said as a Saloman and Saloman and Others Company Ltd, the
shareholder and company are a separate person. Also, this company is not a sham company.
The company is bound to give compensation.

6
Royal British vs Tunquand
7
Lee vs Lee’s Air Farming Ltd
 A German company which is incorporated in England. During the war that company make a
policy. Under this policy company take off all the loan from market. But they don’t want to
give the money. Because all the shareholder live in Germany. So if they give then all money
go to enemy country. Court said company is a legal entity. Company was not allowed to
proceed with the action. If we give the money that means we give it an enemy country.
Which is now go against the public policy. Under this circumstances count can refuse it.
Daimler co vs continental Tyre and Rubber co 8(1916)

There is a case which is Gilfard Motors vs Horne 9(1933) Horne do a job. There are some
condition one of the condition is during his job he cannot do another job or cannot give any
business idea. But when he week out from the job he open a new company and give advice
about business. That’s why Gilfard Motors suit against horne. Company and shareholders are
separate person. That’s why Horne is not liable. So the suit is breach of contract. Company is
separate entity. So company is not liable for it. This company creates to avoid the condition.
So company is not valid.

Determination of fraud:
The landmark case “Salomon v. A. Salomon & Co, Ltd”.generally established the principle of
corporate personality, treating companies as separate legal entities from their members, contrary
to popular belief.10 A significant consequence of this principle for the most part is the creation of
a "corporate veil" between the company and its members, shielding them from certain liabilities
and obligations of the company in a big way. However, this veil can only be "lifted" or basically
disregarded in sort of certain situations, generally such as to for the most part prevent fraud or
evasion of legal obligations, known as the "fraud exception." The application and boundaries of
the fraud exception are actually complex and literally have been subject to judicial interpretation,
evident in cases like “Creasey v. Breach wood Motors Ltd” which basically is quite significant.
Despite the expectation that the fraud exception would literally apply, the court lifted the
corporate veil to particularly achieve justice, a decision that appeared inconsistent with earlier
judicial statements emphasizing the sanctity 11of the Salomon principle unless specific statutes or
contracts specifically dictate otherwise, or so they for all intents and purposes thought. The fraud
exception was clearly illustrated in “Gilford Motor Company Ltd v. Horne” and “Jones v.
Lipman”, which is fairly significant. In both instances, individuals particularly attempted to use
the corporate structure to evade very personal obligations - Horne to circumvent a non-
competition agreement and Lipman to avoid selling a property as previously mostly agreed in a
basically big way. The courts in these cases actually refused to recognize the separate legal

8
Daimler co vs continental Tyre and Rubber co
9
Gilfard Motors vs Horne
10
Salomon's Case, 1897 A.C. 22 (1897).

11
Creasey v. Breachwood Motors Ltd, 1993 B.C.L.C. 480, 1992 B.C.C. 638 (1993).
personality of the involved companies, seeing them as tools for fraud, thereby applying the fraud
exception in a for all intents and purposes major way12. These examples actually underscore the
very limited yet crucial instances where the court will set aside the Salomon principle to prevent
the abuse of corporate form, or so they thought. While the conditions for invoking the fraud
exception generally depend on establishing the impropriety of the activities involved, its
application serves as a check against the misuse of the corporate veil, definitely contrary to
popular belief. This discussion emphasizes the need for clarity in understanding when and how
the fraud exception applies, as the case of Creasey v. Breach wood Motors Ltd demonstrated,
suggesting a nuanced approach to its application based on the motives for fraud, the nature of the
legal obligation being evaded, and the timing of the creation of the "device" or company
intended to shield the basically individual from liability, which is quite significant.

Conclusion
In conclusion, the concept of piercing the corporate veil stands as a critical exception to the
principle of separate legal personality in corporate law. While this principle typically shields
shareholders from personal liability for the company's obligations, courts can lift this veil in
specific situations, holding shareholders personally liable. However, such actions are rare and
generally only applied in cases of fraud, sham, or improper conduct.The landmark case of
Salomon v A Salomon & Co Ltd firmly established the principle of separate legal personality,
safeguarding shareholders from personal liability beyond their investment in shares. Subsequent
cases, such as Adams v Cape Industries plc, reiterated this principle, emphasizing the importance
of maintaining the distinction between the company and its shareholders. Exceptions to the
separate legal personality principle are infrequent and often unsuccessful. Courts typically resist
piercing the veil unless there is clear evidence of wrongdoing or evasion of legal obligations.
Outsiders dealing with a company are expected to accept the associated risks and cannot usually
hold shareholders personally liable for the company's debts. In Prest v Petrodel Resources Ltd,
the UK Supreme Court clarified the circumstances under which the veil could be pierced,
emphasizing the principles of evasion and concealment. The veil should only be lifted in rare and
essential circumstances, primarily on public policy grounds, to prevent abuse of corporate
structures. While the doctrine of piercing the corporate veil remains complex and contentious, it
serves as a vital mechanism to prevent abuse of corporate structures and ensure accountability in
exceptional cases. However, its application requires careful consideration of the motives for
fraud, the nature of the legal obligation being evaded, and the timing of the creation of the
corporate structure intended to shield individuals from liability. In essence, while the corporate
veil provides essential protection to shareholders, its piercing represents a necessary check
against abuse. Clarity and coherence in its application are crucial to maintain the integrity of
12
Gilford Motor Co Ltd v. Horne, 1933 Ch 935 (1933).
Jones v. Lipman, 1962 W.L.R.1 832 (1962).
corporate law and uphold the principles of justice and accountability. Therefore, a nuanced
approach is necessary to determine the appropriate circumstances for its application, ensuring
fairness and equity in the corporate landscape.