Doctrine of Lifting of Corporate Veil

Introduction: 

It is well known that a company, being a legal person, is a separate legal entity and can sue or  can be sued in its name. But the point arises that every conduct is performed by its members,  shareholders, directors and other related persons, then what criteria should be adopted to decide  the extent of liability. Thus, in such situation, the court lifts the veil of incorporation to examine  the ‘realities’ which lay behind, either authorised by the statutory provisions or by own motion,  where if found the reality, ignores the company and concerns itself directly with the members  and managers. 

Circumstances where this doctrine applies: 

(i) Partnership of two separate corporate entities with one acting as alter ego,  (ii) where actual control in the subsidiary company lies with the parent company (iii) where the name of the company is just a sham 

(iv) where two companies are interlinked 

(v) during execution proceedings including in the matters of tax evasion 

Grounds for the application: 

(i) Determination of character: To determine the public interest and nature of the company as to whether involved in a transaction with the enemy, the courts may examine the persons in real  control of the corporate affairs, as done under Daimler Co Ltd v. Continental Tyre & Rubber  Co. (Great Britain) Ltd.i and if no such danger is found, there is no need to tear open the  corporate veil.

(ii) For benefit of revenue: If the issue is related to the tax evasion or to circumvent tax  obligation, the court has the power to tear open the corporate veil as ultimately it also leads to the  public interest. The leading English and Indian authorities are Apthorpe v. Peter Schoenhofen  Brewing Co. Ltd.ii and CIT v. Associated Clothiers Ltd.iii respectively, where both leads to the  matters of tax-revenue. 

(iii) Fraud or improper conduct: It is to very obvious that a company can’t be wholly strained  of being illegal or fraudulent. In such cases of misrepresentation, fraud, diversion of funds, the  corporate veil is lifted to find the actual liable person.iv 

(iv) Government Companies: In India, this matter relates to those companies which hold the  officers as a shareholder and claims to be the government company to seek the benefits, but in  actual, they are not deemed to be the government company and in this situation, no statute is  imposed on them rather than the companies act, but being treated as government company will  be regarded as an agent of the state and if any issue arises in such companies, the corporate veil  is to be lifted.v 

Related Statutory Provisions: 

Sec. 2(20): “Company” means a company incorporated under this act (Companies Act, 2013) or  any previous company law. 

Sec. 2 (46): “Holding company” means a company concerning one or more other companies,  means a company of which such companies are subsidiary companies; 

Sec. 2 (87): “Subsidiary company” means a company concerning any other company (that is to  say the holding company), means a company in which the holding company— 

(i) controls the composition of the Board of Directors; or 

(ii) exercises or controls more than one-half of the total share capital either at its own or together  with one or more of its subsidiary companies:

Provided that such class or classes of holding companies as may be prescribed shall not have  layers of subsidiaries beyond such numbers as may be prescribed. 

Additional provisions which provide grounds of application: 

(a) Non-compliance of requirements of incorporation [Sec. 464(3)]: In this situation, the  member of a company is held severally and jointly liable with the company.vi 

(b) Mis-description of name [Sec. 12(8)]: As clearly, stated under the Sec. 12 that in case of  non-compliance with the provisions of sec. 12, the person shall be held personally liable.vii 

(c) Contravention relation to audit details [Sec. 147]: Here, the section provides the personal  liability of the partners and other related members on whom the guilt is proved. 

(d) Fraudulent Conduct of Business [Sec. 339]: If in the course of the winding-up of a  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.viii 

Conclusion: 

Thus, it is abundantly clear that incorporation does not cut off the personal liability of members at all times and in all circumstances whether it contains the nature of the separate legal entity. The courts of law concentrate on the facts and evidence to justify the liability of the members of the incorporation, as the case may be. 

Payal Agrawal 

S. S. Jain Subodh Law College, Rajasthan University, Jaipur