1.

Name – Manisha Pabari class: S Y LLB Semester 3 topic : Doctrine of lifting Corporate
veil
2.Index :
3.Introduction: Any established organization has a legal identity of its own, and which is
separate even from the identity of its employees. As it’s obvious that a company itself isn’t a
living body and thus, various members come together to work in the name and behalf of the
company, living under a shadow/veil. This is simply termed as “Corporate Veil”. Under
certain urgent occasions and circumstances, the corporate veil is removed and it’s known as
the ‘piercing of the corporate veil’, which enables the company to check frauds committed
by members. Thus, it’s necessary to know in detail what the corporate veil is.
background: 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 company’s 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 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’.
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).
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.
History: 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 the 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 the
business of Salomon for 39000 pounds, the purchase consideration was paid in terms of
10000 pounds debentures conferring charge on the company’s 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. Lee’s Air Farming Ltd.[iii], it was held that there was a valid contract of
service between Lee and the Company, and Lee was therefore a worker within the meaning
of the Act. It was a logical consequence of the decision in Salomon’s 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 the
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 company’s framework (or
behind the company’s 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 dealing with Lifting of Corporate Veil of the Companies in India
Section 5 of the Companies Act defines the individual person committing a wrong or an
illegal act to be held liable in respect of offenses 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 whole-time 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. 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 being dominus 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.
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. The section applies to all public as well as private companies. Failure to comply with
the 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 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 section postulates
a nexus between fraudulent reading or purpose and liability of persons concerned.
Judicial Interpretations of Lifting of Corporate Veil of the Companies in India
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:
Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd This is an instance
of determination of the 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 the supply of tyre . 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 shareholders were controlled by Germans, the company
was a German company and not a British company and hence it was an enemy company.
Gilford Motor Co. v. Horne– This is an instance for prevention of façade 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 defendant’s service was terminated, he set up a company of
the same business.
His wife and another employee were the main shareholders 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 breach the agreement with
the plaintiff.
Re, FG (Films) Ltd– 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.
Jones v. Lipman– In this case, the seller of a piece of land sought to evade the 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.

4.ROL-> Review of Literature 1. Personality of public corporation and lifting the corporate
veil, By Bahadur & Krishna The term “piercing the corporate veil” refers to a situation in
which courts disregard limited liability and hold investors or directors personally responsible
for the actions or debts of a business. In closed companies, corporate veil penetration is
frequent. While state law differs, courts typically have a strong presumption against
breaching the corporation veil and will do so only if significant wrongdoing has occurred.
Courts recognise the advantages of limited liability because it “promotes the establishment
of public markets for stocks, thus enabling the liquidity and diversification benefits those
investors get from such markets.” Creditors generally have no recourse against corporate
stockholders as long as certain requirements are met. When, on the other hand, the
company is formed illegally in order to avoid responsibility, creditors may penetrate the
corporate veil. 2. Piercing the corporate veil: Focussing the inquiry, By Cathy S. Krendl &
James R. krendl The legal personality conferred to a corporation by legislation, in contrast to
the individuals who comprise it, is arguably the most basic concept of company law and
serves as a critical building block of our economic and legal structures. However, the concept
is not absolute: courts have sometimes used their authority to ignore the company’s distinct
identity in order to treat it as one with its controller. However, the basis for and extent of
this authority have only been defined seldom by the higher courts. The article discusses
previous judicial assessments of penetrating the corporate veil in England and compares
them to the Indian courts’ most recent approach to the same issue. 3. Wedded to Salomon:
Evasion, Concealment and confusion on piercing the veil of the one -man company, By
Hannigan & Brenda This paper examines two principles namely, concealment principle, and
evasion principle. The concealment principle is that a company is involved in a transaction to
hide the true nature of the transaction. The Evasion principle is that where there is a legal
right against a person who is in charge of controlling the company, the company is
interposed in such a manner so that the principle of a separate legal entity defeats the legal
right against that person. It is concluded that the limited principle of English law applies
where a person is subject to an existing legal duty, responsibility, or limitation that he
intentionally avoids or whose enforcement is intentionally frustrated by interposing an
organisation under his control. To prevent the company or its controller from benefiting
from the legal personality of the firm, a court may breach the corporate veil. However, this
may only be done in limited circumstances. Even if the criteria are met in virtually every
situation when it is applied, the circumstances in practise reveal a legal link between the
firm and its controller, therefore piercing the corporation’s veil isn’t essential.
4. Lifting the corporate veil, By P. M. Bakshi This paper mentions that earlier in the year 1897
the legal world witnessed the literal interpretation of the law by the House of lords
neglecting the notions of equity and fairness. However, the idea of the lifting of the
corporate veil involves moving the iron curtain a bit to peer into the backstage of the firm to
see who’re individuals behind the company and to also know about the genuine brains
behind a corporation. The paper covers a plethora of cases when raising the iron curtain
becomes important to glimpse the backstage of a corporation simply to comprehend the
objective of its incarnation better in the first place. The theory of the removal of the
corporate veil functions as a check on anybody seeking to gain out of their wrongful conduct
hiding behind the firm taking refuge and performing acts which the law otherwise bans. This
paper attempts at describing how this concept have questioned, and yet has assisted in
enriching the jurisprudence. It also gives an evaluation of the cases where lifting of the veil is
justified for attaining the purposes of justice. Further, this article constructs an analysis from
the genesis of the doctrine to its present form.
5.Suggest, analysis, Recommendations : One of the fundamental concepts of corporate law
is that when a company is formed under the Companies Act, it establishes a distinct legal
entity from its members. However, if it is discovered that the business engaged in unlawful
activity or that its operations were not handled in accordance with the rules, the
shareholders may be held personally responsible and their personal assets may be seized.
What function does piercing the corporate veil serve? If a court pierces a corporation’s or
LLC’s corporate veil, its owners, shareholders, or members may be held personally
responsible for corporate obligations. This implies that creditors may seize the owners’
primary residence, bank account, investments, and other property in order to pay the
corporate debt.
6.Conclusion: As the foregoing debate comes to a close, we can see that UK and India have
come to essentially the same understanding with regard to this situation, taking into
consideration the history of both countries and the similarities of their respective legal
systems. Focusing on the cases at hand, the Prest verdict, while consistent with the Salomon
principle, can be considered unfair. With relevance to the common law countries, they
follow the Salomon case and believe it to be the Bible of all like nature cases. All their
judgment is based on it. Every case after that has only built on the same, which is an
excellent approach if the situation calls for it, as with regard to civil law. So, to summarise,
even though the outcome in the Prest case was unjust for the other spouse. Even though the
Indian government was denied billions of rupees in the Vodafone case as a result of this
strict application of company law, it has provided clarity regarding the grounds on which the
piercing of corporate veil can be done.
7.Bibliography, reference : 1. Saloman v. Saloman & amp Co Ltd, (1897) A.C. 22.
2. Bahadur & Krishna, Personality of public corporation and lifting the corporate veil, vol. 14,
no. 2, JOURNAL OF THE INDIAN LAW INSTITUTE, 207–227 (1972).
3. Hannigan & Brenda, wedded to Salomon: Evasion, Concealment and confusion on piercing
the veil of the one -man company, 50 IRISH JURIST, 11–39 (2013).
4. Bakshi, P. M., Lifting the corporate veil, 36(3) JOURNAL OF THE INDIAN LAW INSTITUTE,
383–84 (1994).
5. Lawbhoomi.com