Lifting of Corporate Veil in India on Judicial Grounds

INTRODUCTION

“The ghost of Salomon’s case still visits frequently the hounds of Company Law but the veil has been pierced in many cases.”[1]

When a company is incorporated it is treated as a separate legal entity. This is one of the basic features of company law which was laid down by the House of Lords in Salomon v. Salomon & Co. case. It is treated as an independent person distinct from its directors, members and employees, but in reality, it is a group of individuals who come together to do business. This is this person who carries the business and runs the company. The company enjoys a legal personality; it can sue and be sued. The members of the company are also protected against personal liability. Although a company is a person in the eyes of law, sometimes members commit fraud or illegal acts under the legal façade of the company. Since an artificial person cannot commit fraudulent act all on its own, it is because of this the concept of the lifting of the corporate veil has been evolved. There are instances where the court has lifted the veil and break the principle to find out the real culprit. But there is no straight jacket proof formula to know when the court will lift the veil. In this article, we will try to analyze instances where to court has gone beyond its limit to find out the truth.

Meaning of the doctrine

Lifting the corporate veil means disregarding the corporate personality and looking behind the real person who is in the control of the company.[2] Sometimes people try to take advantage of the corporate personality and commit frauds behind the curtain. To catch these people who are hiding behind the curtains, the corporate veil is pierced.

Lifting of Corporate Veil in Indian Scenario-

Most of the things of Indian company law are borrowed from English laws. So the courts strictly follow the decision laid down by the Salomon case i.e. company is the separate legal entity from the members, shareholders and employees.

Tata Engineering Locomotive Co. Ltd. v. State of Bihar and others[3]

“The corporation in law is equal to a natural person and has a legal entity of its own. The entity of the corporation is entirely separate from that of its shareholders; it bears its own names and has a 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.”

But with the changing time, the court has started to shift its approach from a traditional approach to a pragmatic approach. Now lifting of corporate veil doctrine has been most widely used by the courts. It continued to be the most discussed topics of all the time. But till now there is no unanimity regarding the present rules. The Courts in India have generally applied the principle of Salomon v. Salomon & Co.[4], but with the changing times’ courts have recognized the doctrine of the lifting of the veil. The Company’s Act 2013 has laid down certain provisions where the court can lift the veil to reach the persons who are responsible for the wrongful act.

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In State of UP v. Renusagar[5], the court has applied the doctrine of lifting the corporate veil. The Supreme Court has held that the doctrine of lifting the corporate veil is expanding in the modern jurisprudence.

The doctrine of lifting the veil is generally not confined with the Company’s Act 2013. But the veil can be lifted in any case where the court finds out anything affecting the general public interest and affected parties.

In Kapila Hingorani v. State of Bihar[6], the court held that “a company incorporated under the Companies Act is a juristic person and has a distinct and separate entity vis-à-vis its shareholders. The corporate veil, however, can in certain situations be pierced or lifted. Whenever a corporate entity is abused for an unjust and inequitable purpose, the court would not hesitate to lift the veil and look into the realities to identify the persons who are guilty and liable thereof. The veil can indisputably be lifted when the corporate personality is found to be opposed to justice, convenience and interest of the revenue or workman or against the public interest”.

In Life Insurance Corporation of India v. Escorts Limited and Others[7], the Supreme Court laid down two major instances when the corporate veil is lifted. These are –

  1. Statutory provisions
  2. Judicial grounds

JUDICIAL GROUNDS-

The corporate evil is said to be lifted when the court ignores the company corporate personality and concerns itself directly with the members or the managers. The matter is largely in the discretion of the courts and will depend upon “the underlying social, economic and moral factors as they operate in and through the corporation.”[8] It can be said, “that adherence to the Salomon principle will not be doggedly followed where this would cause an unjust result”.[9]

But the following grounds have become well-established for the lifting of the veil of a corporate entity. Apart from the statutory provisions, the courts in India on its discretion also lift the corporate veil on certain grounds. Some of the cases in respect of this are-

1) Fraud or Improper Conduct– The most common ground when the courts lift the corporate veil is when the members of the company are indulged in fraudulent acts. The intention behind it is to find the real interests of the members. The courts have been more than prepared to pierce the corporate veil when it feels that fraud is or could be perpetrated behind the veil. The courts will not allow the Salomon principle to be used as a weapon of fraud.

The two classic cases of the fraud exception are-

 Gilford Motor Company Ltd v. Horne[10]

In this case, Gilford made a company named Gilford Motor to sell, assemble the part of the vehicle. He hired Horne as the managing director of the company. But soon his service got terminated. So he made a new company and started selling the vehicles part to the existing company’s customers. Gilford Company filed for an injunction of the Horne’s company to sell the part of the vehicle.

The court held- When the company has been used as a mere sham or cloak to save themselves from the liability then the court can lift the veil to punish the real culprit behind it.

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Jones v. Lipman[11]

In this case, Mr Lipman contracted Jones to sell his property for £5,250.00. While the transaction was pending Mr Lipman sold his property to another company, which was made by Mr Lipman and his law clerk for the sole purpose to purchase the property at a lower price. Jones filed the suit against Lipman.

The Court held- the sole purpose for which the company was made was to buy the property at a lower price. The company was a sham or façade behind which Lipman intended to evade the former contract with Jones.

 Shri Ambica Mills Ltd., Re,[12] the court held that the corporate veil of the company can be lifted in cases of criminal acts of fraud by officers of a company. Similarly, the court pierced the corporate veil in the case of VTB Capital v. Nutritek[13] and held the directors personally liable for obtaining loan fraudulently.

2) Tax Evasion– Sometimes, the corporate veil is used for tax evasion or to avoid any kind of tax obligation. It is not possible for the legislature to fill all the gaps in the law and thus the judiciary needs to interfere. In such cases, the courts lift the veil of the company to find out the real state of affairs of the company. The leading case of Vodafone[14] was an example of the corporate structure formed to evade the taxes. The apex court, in this case, observed that – “Once the transaction is shown to be fraudulent, sham, circuitous or a device designed to defeat the interests of the shareholders, investors, parties to the contract and also for tax evasion, the Court can always lift the corporate veil and examine the substance of the transaction.” The Court, in this case, entitled the Income Tax Office to pierce the corporate veil of the company.

Bacha F. Guzdar v. Commissioner of Income-tax[15]

Held- that although the income in the hands of the company was partly agricultural, yet the same income when received by the shareholders as dividend could not be regarded as agricultural income.

Premier Construction Co. Ltd. V. Commissioner of Income-tax, Bombay City[16]

It dealt with the nature of commission of managing agent of whose income as part of agriculture income.

Held: that the managing agent does not receive any agricultural income as defined by the act. But his commission was as a part of a personal service contract between him and the employer.

3) AGENCY- Usually, Agent Company is those companies which are fully controlled by the parent company. The parent company is held liable for the acts of the agent company if the orders were given or work assigned by them is within their authority. There is no presumption that one company is the agent company of the other unless there is an agreement for the same. Usually, agents companies are made by the parent company when they are not able to get something on their own to get it done by the parent company. In the case of Salomon v. Salomon[17] Justice Vaughan Williams expressed that the company was nothing but an agent of Salomon. “That this business was Mr Salomon’s business and no one else’s; that he chose to employ as agent a limited company; that he is bound to indemnify that agent the company and that this agent, the company has a lien on the assets………” However, on appeal to the House of Lords, it was held that a company did not automatically become an agent of the shareholder even if it was a one-person company, and the other shareholders were dummies.

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Smith Stone and knight v. Birmingham Corporation[18]

A subsidiary of the plaintiff company took over the waste business. The subsidiary company was controlled by the plaintiff company. All the profits of the subsidiary company were transferred to the plaintiff company. Plaintiff company treats the subsidiary company as the department of the plaintiff company. When lands held by the plaintiff company was acquired by the Birmingham Corporation, the plaintiff claimed compensation for the disturbance caused to the subsidiary business.

Held- Subsidiary was carrying the business as the agent of the plaintiff company.

In cases where the agency agreement holds good and the parties concerned have expressly agreed to such an agreement them the corporate veil shall be lifted and the principal shall be liable for the acts of the agent.

4) ENEMY CHARACTER- At times of war, the court is prepared to lift the corporate veil and determine the nature of shareholding as it did in the Daimler case[19] where German shareholders held the shares of an English company during the time of World War I.

CONCLUSION-

This article makes it clear that there is no hard and fast rule to know when the corporate veil can be lifted. As no specific standards have been laid down by the court to lift the veil. It is up to the discretion of the judiciary to decide by going to the facts and circumstances of each case. The judiciary has created mockery on the issue of the piercing of veil. Courts and legislatures have to pen down the rules regarding the lifting of corporate veil which can be treated as a universal character and can be treated with uniformity, consistency within the corporate world. 

[1] State of Uttar Pradesh v. Renusagar, (1988) 1 S.C.R. Supp. 627, 668 (India).

[2] http://www.legalservicesindia.com/article/1876/Lifting-of-Corporate-Veil:-Indian-Scenario.html.

[3] 1964 SCR (6) 885

[4]   [1897] AC 22, HL

[5]  AIR 1988 SC 1737

[6] (2003) 6 SCC 1

[7] 1985 SCR Supl. (3) 909

[8] Tata Engineering Locomotive Co v. State of Bihar AIR 1965 SC 40

[9] Odyssey (London) Ltd. v. OIC Run-Off Ltd. (2000) TLR 201 CA

[10] Gilford Motor Co Ltd v Horne [1933] Ch. 935 (CA)

[11] Jones v. Lipman [1962] l WLR 832

[12]   1897 AC 22

[13]  [2012] EWCA Civ 808

[14] Vodafone International Holdings B.V. v. Union of India & Anr, (2012) 6 SCC 613

[15] 1955 AIR 740

[16] (1949) 51 BOMLR 3

[17] Supra

[18] [1939] 4 All ER 116

[19] Daimler Co Ltd v. Continental Tyre & Rubber Co (Great Britain) Ltd [1916] 2 A.C. 307 (HL)

 

Author: Riddhi daga,

Intern at Lawportal,

Email: dagaridhi.rd@gmail.com

Author: Riddhi daga,
Hidayatullah National Law University, 3rd year student

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