Piercing of Corporate Veil or Lifting of Corporate Veil
When a company is recognised as a separate legal entity, distinct from its members, the doctrine of corporate personality is deemed to have been attributed to the company. A company thus has an independent legal existence that is separate from the rights and duties bestowed upon its shareholders, directors and officers. Though the members of the company are often protected by the veil of incorporation, this veil could be lifted when it is found that gross mismanagement of the affairs of company is taking place. However, this decision to lift the corporate veil is taken only in dire circumstances after much deliberation by the Courts. This is not the normal path of law but it is rather an exception to the doctrine of corporate personality.
In most countries a company is equal in law to a natural person, that is, they have their own distinct rights and duties which is recognised by the law. This has been an important feature in the Indian Company Law and has been followed in most common law countries ever since the ruling of Salomon v. Salomon & Co.[1] Even before this Judgment was passed, the Judiciary in the Kondoli Teac Co Ltd, re[2] passed a ruling emphasising the distinction between legal personalities of the company from that of its members. In this case, a transfer of a tea estate from the individual shareholders of a company to the company had taken place and the shareholders sought exemption from ad valorem duty on the ground that they were the only shareholders of the company and that the transfer occurring was from them to themselves under another name. The Calcutta High Court held, “The Company was a separate person, a separate body altogether from the shareholders and the transfer was as much a conveyance, a transfer of the property, as if the shareholders had been totally different person.”
Though a separate corporate personality is the norm, there is an exception to this rule that occurs when the corporate veil of the Company is lifted. The corporate veil is said to be lifted when the Courts disregard the corporate personality of the Company and look into the individuals who are in charge of the Company. Black Law’s Dictionary defines piercing of corporate veil as “the judicial act of imposing personal liability on otherwise immune corporate officers, directors, or shareholders for the corporation’s wrongful act.[3] According to Palmer, there are five circumstances under which the corporate veil of a company can be lifted:
“(i) “Where companies are in a relationship of holding and subsidiary (or sub-subsidiary) companies;
(ii) Where a shareholder has lost the privilege of limited liability and has directly liable to certain creditors of the company on the ground that, with his knowledge, the company continued to carry on business for six months after the number of its member was reduced below the legal minimum;
(iii) In certain matters pertaining to law of taxes, death duties and stamps, particularly wherein the question of the “controlling interest” is in issue;
(iv) In the law relating to exchange control; and
(v) In the law relating to trading with enemy where the test of control is adopted.”[4]
There are also certain provisions present in the Indian Companies Act that provides circumstances which can be construed as being adjacent to the doctrine of lifting of corporate veil:
Section 7(7) of the Act states that during the incorporation of the company if false information is provided, the National Company Law Tribunal has the power to “direct that liability of the members shall be unlimited”. Similarly, according to Section 251(1), any company that makes a fraudulent application with the intention to the creditors or to defraud any other persons the persons in charge of the management of the company shall be jointly and severally liable to persons who incurred loss or damage.
Section 34 and 35 states that if the prospectus of a company has false information and this is done deliberately then the members with such intentions who are mentioned in subsection (1) will be liable unlimitedly for all or any of the losses or damages that may have been incurred by any person who subscribed to the securities on the basis of such prospectus.
According to the Companies (Prospectus and Allotment of Securities) Rules,2014 , if the stated minimum amount has not been subscribed and the sum payable on application is not received within the period specified therein, then the application money shall be repaid within a period of fifteen days from the closure of the issue and if any such money is not so repaid within such period, the directors of the company who are officers in default shall jointly and severally be liable to repay that money with interest at the rate of fifteen percent per annum. Sections 216 states that if the Central Government has the power to appoint investigators to investigate those who have financially interested or those who have control over the policy or those have beneficial interest in the shares of the company. Section 339 allows the piercing of veil if it is found (during the winding up process) that the business has been conducted in a fraudulent manner.
The Judiciary has also played a very important role in the evolution of the concept of piercing of veil in India. The Indian Supreme Court in Kapila Hingorani v. State of Bihar[5] held that when the corporate veil between an entity and its shareholders is judged to be ‘opposed to justice, convenience, and interest of the revenue or workman, or against public interest,’ the veil can be lifted. It was held in Uttar Pradesh v. Renusagar Power Company[6] that enumerating the classes of cases in which lifting the veil is permissible was needed because each Judgment would inevitably depend on a variety of factors, including the relevant provisions of the applicable legislation, the object sought to be achieved, the company’s alleged conduct, the interference with public interest, and the impact on stakeholders.
The essential attribute of a corporation sole was highlighted by the Supreme Court in Govind Menon V Union of India[7]. The court noted that the Corporation has its own legal personality. It is made up of only one individual who is legally incorporated. The same person can have two identities: one as a natural person and the other as a corporation sole, the latter of which is established by statute. As Salmon proclaimed, “The live official comes and goes but this offspring of the law remains the same for ever”. Supreme Court in New Horizons Ltd. v. Union of India[8] held that in circumstances when the notion of corporate personality is flagrantly opposed to justice, convenience, or in the interest of revenue, the corporate veil may be lifted and the corporate entity’s independence would be disregarded.
The Supreme Court of India, in the landmark case of Life Insurance Corporation of India v Escorts Ltd & Others[9] stated that Individual members of a company’s corporate identity may be separated from the corporation’s identity for who they are under certain unusual circumstances. In Santanu Ray v. Union of India[10] it was alleged that the company had violated section 11(a) of the Central Excises and Salt Act, 1944 and the Court held that adjudicating authorities might lift the corporate veil in order to discover which of the directors was involved in evading the excise duty through fraud, concealment, deliberate misstatement or suppression of facts, or disobedience of the Act and its rules.
In Formosa Plastic Corporation Ltd. v. Ashok Chauhan[11], a foreign decree was sought to be enforced in India and the Delhi High Court held that it was open for the Court in execution proceedings to resort to the power of lifting the corporate veil. The Punjab and Haryana High Court in Sai Sounds Private Limited v Kiran Contractors Private Limited[12] has also affirmed this view.[13]
The Supreme Court in Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd[14] held that when the main goal of the new company’s formation was to utilise it as a method to decrease the amount to be paid as a bonus to workers, the Court has the right to pierce the veil and examine the true transaction.
[1] Salomon v A Salomon and Co Ltd (1897) AC 22
[2] Kondoli Teac Co Ltd, re ILR (1886) 13 Cal 43
[3] Piercing the corporate veil, BLACK’S LAW DICTIONARY. (9th ed. 2009)
[4] Palmer’s Company Law. 20th Edition, 126
[5] Indian Supreme Court in Kapila Hingorani v. State of Bihar JT 2003 (5) SC 1
[6] Uttar Pradesh v. Renusagar Power Company 1988 AIR 1737 1988 SCR Supl.
[7] Govind Menon V Union of India AIR 1967 SC 1274
[8] New Horizons Ltd. v. Union of India 1995 SCC (1) 478
[9] Life Insurance Corporation of India v Escorts Ltd & Others 1984 SCR (3) 643
[10] Santanu Ray v. Union of India 65 (1989) DLT196
[11] Formosa Plastic Corporation Ltd. v. Ashok Chauhan 76 (1998) DLT 817
[12] Sai Sounds Private Limited v Kiran Contractors Private Ltd (2016) 1822 PLR 518
[13] https://www.mondaq.com/india/trials-appeals-compensation/924776/lifting-of-corporate-veil-in-execution-proceedings
[14] Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd (1986) 157 ITR 77 (SC)
Author: Aditi Shanmugam,
Chettinad School of Law, 2nd year/ Student