This article is written by Dhruv Bhardwaj, a student of Amity Law School Delhi; and Kishita Gupta, an advocate who graduated from the Unitedworld School of Law, Karnavati University in Gandhinagar. In this article, they will cover the concept of the Corporate Veil under the Companies Act, 2013, the need for introducing this concept and the circumstances under which the Corporate Veil can be lifted. The article covers the concept in leading nations of the world not just the Indian scenario.

It has been published by Rachit Garg.

Introduction 

Once a business is incorporated according to the provisions laid out in the Companies Act of 2013, it becomes a separate legal entity. An incorporated company, unlike a partnership firm, which has no identity of its own, has a separate legal identity of its own which is independent of its shareholders and its members. This article will go over what this differentiation means, why this demarcation was brought about and how can the members be made personally liable for using the company as a vehicle for undesirable purposes. 

What is Corporate Veil 

A company is composed of its members and is managed by its Board of Directors and its employees. When the company is incorporated, it is accorded the status of being a separate legal entity which demarcates the status of the company and the members or shareholders that it is composed of. This concept of differentiation is called a Corporate Veil which is also referred to as the ‘Veil of Incorporation’.

Meaning of Lifting of Corporate Veil

The advantages of incorporation of a company like perpetual succession, transferable shares, capacity to sue, flexibility, limited liability and lastly the company being accorded the status of a separate legal entity are by no means inconsiderable, under no circumstance can these advantages be overlooked and, as compared with them, the disadvantages are, indeed very few. 

Yet some of them, which are immensely complicated deserve to be pointed out. The corporate veil protects the members and the shareholders from the ill-effects of the acts done in the name of the company. Let’s say a director of a company defaults in the name of the company, the liability will be incurred by the company and not a member of the company who had defaulted. If the company incurs any debts or contravenes any laws, the concept of Corporate Veil implies that the members of the company should not be held liable for these errors.

Basics of Limited Liability

Organizations exist to a limited extent to shield the individual resources of investors or shareholders from individual obligation for the obligations or activities of a company. Almost opposite to a sole proprietorship in which the proprietor could be considered in charge of the considerable number of obligations of the organization, a company customarily constrained the individual risk of the investors. This is why Limited Liability as a concept is so popular.

Puncturing the Veil of Incorporation commonly works best with smaller privately held companies in which the organization has few investors, restricted resources, and acknowledgement of the separateness of the partnership from its investors.

Germany

German corporate law built up various speculations in the mid-1920s for lifting the corporate veil based on “control” by a parent company over a subsidiary. Today, investors can be held subject on account of an obstruction devastating the partnership. The company is qualified for at least impartial assets. 

Rolf Serick elaborated on the phrase “durchgriffshaftung” in great detail, and numerous observers emphasised its importance. The independent entity of a firm should be ignored in some situations, as the courts had already agreed. This does not nullify the legal entity itself, even if the veil is breached. Durchgriffshaftung refers to situations not governed by statutory or other legal norms in which an entity’s existence is disregarded and the owner is held personally accountable for the company’s debts. 

In general, only if bankruptcy proceedings are started will owners be held personally accountable for the company’s debts. Hence, durchgriffshaftung is typically seen as a shareholder’s complementary and ultimate liability. From the perspective of a creditor, a shareholder’s personal obligation arising from penetrating the veil is irrelevant until the debtor company experiences financial difficulty. The facts indicating a shareholder’s obligation often don’t surface until such circumstances exist. 

German statutes such as Section 13 of the Act on Limited Liability Companies (GmbHG) and Section 1 of the German Stock Corporation Act (AktG) deal with the principles of the corporate veil and limited liability. 

United Kingdom

The corporate veil in UK company law is pierced every once in a while. After a progression of endeavours by the Court of Appeal during the late 1960s and mid-1970s to set up a straight-jacketed formula for lifting the veil, the House of Lords reasserted a universal methodology. As indicated by a 1990 case at the Court of Appeal, Adams v Cape Industries plc, the main genuine “veil piercing” may happen when a company is set up for false purposes, or where it is set up to avoid a statutory obligation. 

Tort Victims and Employees

Tort victims and representatives, who did not contract with an organization or have very inconsistent and limited dealing power, have been held to be exempted from the standards of limited liability in Chandler v Cape plc. In this leading case law, the petitioner was a representative of Cape plc’s entirely claimed subsidiary, which had gone insolvent. He effectively acquired a case of tort against Cape plc for causing him an asbestos sickness, asbestosis. Arden LJ in the Court of Appeal held that if the parent had meddled in the activities of the subsidiary in any capacity, for example, over exchanging issues, then it would be connected with obligation regarding wellbeing and security issues. Arden LJ underscored that piercing the corporate veil was a bit much in this case. The limitations on lifting the veil, found in legally binding cases had no effect.

“Single Economic Unit” Theory 

It is a proverbial standard of English company law that a company is an element isolated and unmistakable from its individuals, who are at risk just to the degree that they have added to the company’s capital: Salomon v Salomon. The impact of this standard is that the individual backups inside a combination will be treated as independent elements and the parent cannot be made obligated for the auxiliaries’ obligations on insolvency. This standard particularly applies in Scotland. 

While on the face of it, it may look like there are a lot of scenarios for “lifting” or “piercing” the veil, judicial dicta is of the view that the standard in Salomon is liable to special cases are slender on the ground. Lord Denning MR sketched out the hypothesis of the “single economic unit” – wherein the court analyzed the overall business task as an economic unit, instead of a strict legal form -in DHN Food Distributors v Tower Hamlets.  

The “single economic unit” hypothesis was in like manner dismissed by the CA in Adams v Cape Industries,  where Slade LJ held that cases, where the standard in Salomon had been circumvented, were just occasions where they didn’t have a clue what to do. The view communicated at first case by HHJ Southwell QC in Creasey v Breachwood that English law “unquestionably” perceived the rule that the corporate veil could be lifted was depicted as a sin by Hobhouse LJ in Ord v Bellhaven, and these questions were shared by Moritt V-C in Trustor v Smallbone,  the corporate veil cannot be lifted only because equity requires it. In spite of the dismissal of the “equity of the case” test, it is observed from judicial thinking in veil piercing cases that the courts utilize “fair circumspection” guided by general standards, for example, mala fides to test whether the corporate structure has been utilized as a simple device. 

Perfect Obligation

In the landmark case of Tan v Lim,  where an organization was utilized as a “façade” (per Russell J.) or in common layman terms, to defraud or to swindle the lenders of the respondent and Gilford Motor Co Ltd v Horne, where an order was conceded against a merchant setting up a business which was simply a vehicle enabling him to evade a pledge in limitation. The common element in these two cases was the element of defrauding the other person via the vehicle of the company. The company in fact was set up for absolutely no other purpose collateral to it. The main purpose was to defraud. Also, in Gencor v Dalby, a suggestive remark was provided that the corporate veil was being lifted where the organization was having an image exactly similar to that of the litigant. In reality however, as Lord Cooke (1997) has noted extrajudicially, it is a result of the different characters of the organization concerned and not regardless of it that value interceded in these cases. They are not occurrences of the corporate veil being pierced but rather include the utilization of different standards of law.

Reverse Piercing

There have been cases in which it is to the benefit of the shareholder to have the corporate structure overlooked. Courts have been hesitant to consent to this.  The often referred to case Macaura v Northern Assurance Co Ltd is an example of that. Mr Macaura was the sole proprietor of an organization he had set up to develop timber. The trees were devastated by flame yet the back up plan wouldn’t pay since the strategy was with Macaura (not the organization) and he was not the proprietor of the trees. The House of Lords maintained that refusal was dependent on the different lawful character of the organization.

Criminal Law

In English criminal law, there have been cases in which the courts have been set up to pierce the veil of incorporation. For instance, in seizure procedures under the Proceeds of Crime Act 2002 monies gotten by an organization can, contingent on the specific facts of the case as found by the court, be viewed as having been ‘acquired’ by a person (who is for the most part, yet not generally, a chief of the organization). As a result, those monies may turn into a component in the person’s ‘advantage’ acquired from a criminal lead (and consequently subject to seizure from him). The position with respect to ‘piercing the veil’ in English criminal law was given in the Court of Appeal judgment on account of R v Seager in which the court said: 

There was no significant contradiction between directions on the lawful standards by reference to which a court is qualified for “pierce” or “rip” or “evacuate” the “corporate veil”. It is “hornbook” law that an appropriately framed and enrolled organization is a different legitimate element from the individuals who are its shareholders and it has rights and liabilities that are independent of its shareholders. A court can “pierce” the carapace of the corporate element and see what lies behind it just in specific conditions. It can’t do as such basically on the grounds that it thinks of it as may be simply to do as such. Every one of these conditions includes inappropriateness and deceitfulness. The court will at that point be qualified for search for the legitimate substance, not just simply the structure. With regards to criminal cases, the courts have recognized at any rate three circumstances when the corporate veil can be pierced. First, if an offender endeavours to shield behind a corporate façade, or veil to shroud his crime and his advantages from it. Secondly, where the transaction or business structures comprise a “gadget”, “shroud” or “hoax”, for example, an endeavour to mask the genuine idea of the transaction or structure to delude outsiders or the courts.

United States

In the United States, corporate veil piercing is the most contested issue in corporate law. Although courts are hesitant to hold a functioning shareholder at risk for activities that are legitimately the obligation of the organization, regardless of whether the partnership has a solitary shareholder, they will regularly do as such if the enterprise was particularly rebellious with corporate customs, to forestall misrepresentation, or to accomplish value in specific instances of undercapitalization.

To put it plainly, there is no strait-jacketed formula that exists here and the decision entirely depends on customary law points of reference. In the United States, various hypotheses, most significant “modify the sense of self” or “instrumentality rule”, endeavored to make a piercing standard. Generally, they rest upon three essential pillars—namely:

• Unity of Interest and Ownership: This is a situation in which the different personalities of the shareholder and organization stop to exist.
• Conduct which is Wrongful in Nature: In case the corporation takes steps which are deemed to be wrongful in nature.
• Proximate Cause:  If the company indulges in wrongful conduct, there must be some foreseeable ramifications that might be arising out of it, so the party which is actually seeking the piercing of the corporate veil must have suffered some harm arising out of the wrongful conduct of the corporation.

Despite all these guidelines laid out, the speculations neglected to explain a genuine methodology which courts could legitimately apply to their cases. Accordingly, courts battled with the confirmation of every circumstance and rather examine every given factor. This is known as “totality of circumstances”.

Another apparent question here is to decide the jurisdiction of a corporation if the business of the corporate entity is not limited to just one state. All enterprises have one place of business where they were initially set up and incorporated, (their “home” state) to which they are incorporated as a “household” company, and in the event that they work in different states, they would apply for power to work together in those different states as a “remote” organization. In deciding if the corporate veil might be pierced, the courts are required to utilize the laws of the company’s home state and not the numerous other states that they might be doing business in. 

This issue, at first sight, may not look like a big thing to worry about but sometimes it can be huge; for instance, Californian law is progressively liberal in enabling a corporate veil to be pierced, the standards that the Californian Corporate Law has set in terms of scenarios under which the Veil can be pierced are quite many in number and even if an organisation simply encroaches wrongdoing, the Courts might order for the Piercing of the Veil, while the laws of neighbouring Nevada are quite strict when it comes to piercing the veil. The law in Nevada may allow the veil to be pierced only under exceptional circumstances and thus it makes doing such things increasingly troublesome. 

Therefore, the owner(s) of an organization working in California would be liable to various potential for the company’s veil to be pierced if the enterprise was to be sued, contingent upon whether the partnership was a California residential partnership or a Nevada remote organization working in California. 

By and large, the offended party needs to demonstrate that the incorporation was only a formality and there was nothing more to it and that the enterprise dismissed corporate customs and conventions, for example, using the voting method to approve the daily decisions of the corporate entity. This is regularly the situation when an enterprise confronting lawful obligation moves its benefits and business to another company with a similar administration and shareholders. It likewise occurs with single individual enterprises that are overseen in a random way. All things considered, the veil can be pierced in both common cases and where administrative procedures are taken against a shell enterprise.

Factors for courts to consider

Variables that a court may think about when deciding whether or not to pierce the Corporate Veil include the things that are laid out below:

• Non-appearance/Absence or mistake of corporate records; 
• In case the members of the corporation are misrepresented or concealed; 
• Inability to look at  corporate conventions regarding conduct and documentation; 
• Mixing of advantages enjoyed by the enterprise and the shareholder; 
• Control of assets or liabilities to concentrate them; 
• Non-working corporate officials as well as chiefs; 
• Noteworthy undercapitalization of the business (capitalization necessities fluctuate depending on the industry, area, and specific conditions of the corporation which may vary from one company to the other); 
• Directing of corporate assets by the predominant shareholder(s); 
• Treatment by a person of the advantages of partnership as his/her own; 
• Was the enterprise being utilized as a “façade” for predominant shareholder(s) individual dealings like we have already seen in the article that some companies are set up only to defraud other persons or corporations and their incorporation serves absolutely no other purpose.

It is essential to take note that not all these elements should be met altogether for the court to pierce the corporate veil. Even if the corporation indulges in a few of the aforementioned bulleted provisions, it is well under the radar for getting its veil pierced. Further, a few courts may locate that one factor is so convincing in a specific case that it will discover the shareholders at risk. For instance, numerous enormous organizations don’t pay profits, with no recommendation of corporate inappropriateness, however, especially for a partnership firm which is small the inability to pay profits may propose monetary impropriety. 

Internal revenue service

Lately, the Internal Revenue Service (IRS) in the United States has utilized corporate veil-piercing contentions and rationale as a method for recovering salary, domain, or blessing tax revenue, especially from business entities which are incorporated for the sole reason of bequest arranging purposes. Various U.S. Tax Court cases including Family Limited Partnerships (FLPs) show the IRS’s utilization of veil-piercing arguments. Since proprietors of U.S. business substances made for resource security and home purposes frequently neglect to keep up legitimate corporate consistency, the IRS has accomplished various prominent court triumphs and victories.

Reverse piercing

Inverted veil piercing is the point at which the obligation of a shareholder is credited to the organization. All through the United States, the general guideline is that turn-around veil piercing isn’t allowed. However, the California Court of Appeals has permitted inverted veil piercing against a limited liability company (LLC) in view of the distinction in cures accessible to lenders with regards to joining resources of an account holders’ LLC when contrasted with connecting resources of an enterprise.

Whether fundamental rights can be claimed by the corporations

The two key issues at stake in the two significant Supreme Court cases involving the doctrine of the lifting of the corporate veil were whether corporations can assert their claim to fundamental rights and whether the corporate veil might be pierced in order to do so.

State Trading Corporation v. The Commercial Tax Officer (1963)

In this case, the State Trading Corporation, a government entity registered under the Indian Companies Act, requested relief from the States of Andhra Pradesh and Bihar by issuing a writ of certiorari or other appropriate writ or direction for quashing the order of the commercial tax officers of the states in question, assessing the corporation to sales tax and also for quashing. The respondents submitted a few preliminary objections questioning the maintainability of the petitions under Article 32 of the Indian Constitution when the Attorney General filed the case for the petitioners.

Two of those initial concerns were:

1. Whether the State Trade Company, a business licenced to operate under The Companies Act of 1956, qualified as a citizen under Article 19 and qualified to request the observance of fundamental rights, and
2. Whether the State Trading Corporation was, despite the formality of incorporation under the Companies Act, in fact, a department and an organ of the Government of India, with the entirety of its capital contributed by the government, and whether it could assert that it had the authority to enforce fundamental rights under Part III of the Constitution against the state as defined in Article 12 of that Constitution.

Tata Engineering and Locomotive Company Ltd. v. State of Bihar (1965)

In the Tata Engineering and Locomotive Company Ltd. case (1965), the petitioners were a company that had been registered under the Indian Companies Act, 1913, and that was engaged in the manufacturing of, among other things, diesel truck and bus chassis, as well as their spare parts and accessories, in Jamshedpur, Bihar. The business offers these items to dealers, state transportation agencies, and other companies operating in different states. Bombay served as the petitioners’ registered office. The petitioners have entered into dealership arrangements with various people to promote their trade around the nation.

In order to conduct business in various regions of India, the petitioners used the appropriate sections of the dealership agreements to sell their products to the dealers. As a result, the petitioners sell their automobiles to consumers, state transportation agencies, and dealers. The petitioners, in this case, argued that because their purchases were made in the course of interstate commerce, they were exempt from paying sales tax. 

On the other side, the sales tax officer argued that because the transactions had taken place within the boundaries of the State of Bihar and were, therefore, intra-state sales, they were subject to assessment under the Bihar Sales Tax Act, 1956. The petitioners had been warned by the sales tax officer that if they failed to pay the sales tax, he would take the appropriate legal action. The majority of the company’s stockholders were and still are Indian nationals. In this case, the petitioners also cited Article 32. 

Concluding remarks for both cases

Hence, the 1965 case involved a privately owned firm, but the 1963 case included a government-owned one. Nonetheless, both of the companies were registered under the Indian Companies Act. In both instances, the court refused to pierce the corporate veil and acknowledged that the shareholders were the ones who had filed the Article 32 motion. This is due to the fact that it would actually imply that what businesses cannot accomplish directly, they may accomplish indirectly by depending on the notion of lifting the veil.

The Supreme Court declined to pierce the veil in the aforementioned cases not because it was thought to be against judicial principles but rather because, in their Lordships’ opinion, the veil could not be lifted in order to grant companies fundamental rights. Then, may it have been lifted in another way? No, not always. Nothing could have been a more practical, wise, and sinful way to raise the curtain if it had ever been lifted in order to provide companies with fundamental rights.

Whether fundamental rights can be claimed by the corporations

The two key issues at stake in the two significant Supreme Court cases involving the doctrine of the lifting of the corporate veil were whether corporations can assert their claim to fundamental rights and whether the corporate veil might be pierced in order to do so.

State Trading Corporation v. The Commercial Tax Officer (1963)

In this case, the State Trading Corporation, a government entity registered under the Indian Companies Act, requested relief from the States of Andhra Pradesh and Bihar by issuing a writ of certiorari or other appropriate writ or direction for quashing the order of the commercial tax officers of the states in question, assessing the corporation to sales tax and also for quashing. The respondents submitted a few preliminary objections questioning the maintainability of the petitions under Article 32 of the Indian Constitution when the Attorney General filed the case for the petitioners.

Two of those initial concerns were:

1. Whether the State Trade Company, a business licenced to operate under The Companies Act of 1956, qualified as a citizen under Article 19 and qualified to request the observance of fundamental rights, and
2. Whether the State Trading Corporation was, despite the formality of incorporation under the Companies Act, in fact, a department and an organ of the Government of India, with the entirety of its capital contributed by the government, and whether it could assert that it had the authority to enforce fundamental rights under Part III of the Constitution against the state as defined in Article 12 of that Constitution.

Tata Engineering and Locomotive Company Ltd. v. State of Bihar (1965)

In the Tata Engineering and Locomotive Company Ltd. case (1965), the petitioners were a company that had been registered under the Indian Companies Act, 1913, and that was engaged in the manufacturing of, among other things, diesel truck and bus chassis, as well as their spare parts and accessories, in Jamshedpur, Bihar. The business offers these items to dealers, state transportation agencies, and other companies operating in different states. Bombay served as the petitioners’ registered office. The petitioners have entered into dealership arrangements with various people to promote their trade around the nation.

In order to conduct business in various regions of India, the petitioners used the appropriate sections of the dealership agreements to sell their products to the dealers. As a result, the petitioners sell their automobiles to consumers, state transportation agencies, and dealers. The petitioners, in this case, argued that because their purchases were made in the course of interstate commerce, they were exempt from paying sales tax. 

On the other side, the sales tax officer argued that because the transactions had taken place within the boundaries of the State of Bihar and were, therefore, intra-state sales, they were subject to assessment under the Bihar Sales Tax Act, 1956. The petitioners had been warned by the sales tax officer that if they failed to pay the sales tax, he would take the appropriate legal action. The majority of the company’s stockholders were and still are Indian nationals. In this case, the petitioners also cited Article 32. 

Concluding remarks for both cases

Hence, the 1965 case involved a privately owned firm, but the 1963 case included a government-owned one. Nonetheless, both of the companies were registered under the Indian Companies Act. In both instances, the court refused to pierce the corporate veil and acknowledged that the shareholders were the ones who had filed the Article 32 motion. This is due to the fact that it would actually imply that what businesses cannot accomplish directly, they may accomplish indirectly by depending on the notion of lifting the veil.

The Supreme Court declined to pierce the veil in the aforementioned cases not because it was thought to be against judicial principles but rather because, in their Lordships’ opinion, the veil could not be lifted in order to grant companies fundamental rights. Then, may it have been lifted in another way? No, not always. Nothing could have been a more practical, wise, and sinful way to raise the curtain if it had ever been lifted in order to provide companies with fundamental rights.

Development of the Concept of “Lifting of Corporate Veil”

Once a company is incorporated, it becomes a separate legal identity. An incorporated company, unlike a partnership firm which has no identity of its own, has a separate legal identity of its own which is independent of its shareholders and its members. 

The companies can thus own properties in their names, become signatories to contracts etc. According to Section 34(2) of the Companies Act, 2013, upon the issue of the certificate of incorporation, the subscribers to the memorandum and other persons, who may from time to time be the members of the company, shall be a body corporate capable of exercising all the functions of an incorporated company having perpetual succession. Thus the company becomes a body corporate which is capable of immediately functioning as an incorporated individual.

The central focal point of Incorporation which overshadows all others is a distinct legal entity of the Corporate organisation. 

Solomon v Solomon

What the milestone case Solomon v Solomon lays down is that “in inquiries of property and limitations of acts done and rights procured or liabilities accepted along these lines… the characters of the common people who are the organization’s employees is to be disregarded”. 

Lee v Lee’s Air Farming Ltd

In Lee v Lee’s Air Farming Ltd., Lee fused an organization which he was overseeing executive. In that limit he named himself as a pilot/head of the organization. While on the matter of the organization he was lost in a flying mishap. His widow asked for remuneration under the Workmen’s Compensation Act. At times, the court dismisses the status of an organization as a different lawful entity if the individuals from the organization attempt to exploit this status. The aims of the people behind the cover are totally uncovered. They are made to obligate for utilizing the organization as a vehicle for unfortunate purposes.

The King v. Portus Ex Parte Federated Clerk Union of Australia

In this case, Latham CJ while choosing whether or not workers of a company which was incorporated in the name of the Federal Government were not employed by the Federal Government decided that the company possesses a distinct identity from that of its shareholders. The shareholders are not at risk to banks for the obligations of the company. The shareholders don’t claim the property of the company.

Life insurance corporation of India v Escorts Ltd.

“It is neither fundamental nor alluring to count the classes of situations where lifting the veil is admissible, since that must essentially rely upon the significant statutory or different arrangements, an outcome which is tried to be achieved, the poor conduct, the element of public interest, the impact on parties who may be affected by the decision, and so forth.”

This was reiterated in this particular case. 

Circumstances under which the Corporate Veil can be Lifted

There are two circumstances under which the Corporate Veil can be lifted. They are:

1: Statutory Provisions

2: Judicial Interpretations

Statutory Provisions

Section 5 of the Companies Act, 2013

This particular section characterizes the distinctive individual engaged in a wrongdoing or a conduct which is held to be wrong in practice, to be held at risk in regard to offenses as ‘official who is in default’. This section gives a rundown of officials who will be at risk to discipline or punishment under the articulation ‘official who is in default’ which includes within itself,  an overseeing executive or an entire time chief.

Section 45 of the Companies Act, 2013

Reduction of membership beneath statutory limit: This section lays down that if the individual count from an organization is found to be under seven on account of a public organization and under two on account of a private organization (given in Section 12) and the organization keeps on carrying on the business for over half a year, while the number is so diminished, each individual who knows this reality and is an individual from the organization is severally at risk for the obligations of the organization contracted during that time.

Madan lal v. Himatlal & Co.

In this case, the respondent documented a suit against a private limited company and its directors because he had to recover his dues. The directors opposed the suit on the ground that at no time did the company carried on business with individual count which was to go below the statutory minimum and in this manner, the directors couldn’t be made severely at risk for the obligation being referred to. It was held that it was for the respondent being dominus litus, to choose the people himself who he wanted to sue.

Section 147 of the Companies Act, 2013

Misdescription of name: Under sub-section (4) of this section, an official of an organization who signs any bill of trade, hundi, promissory note, check wherein the name of the organization isn’t referenced in the way that it should be according to statutory rules, such official can be held liable on the personal level to the holder of the bill of trade, hundi and so forth except if it is properly paid by the organization. Such case was seen on account of Hendon v. Adelman.

Section 239 of the Companies Act, 2013

Power of inspector to explore affairs of another company in the same gathering : It gives that in the event that it is important for the completion of the task of an inspector instructed to research the affairs of the company for the supposed wrong-doing, or a strategy which is to defraud its individuals, he may examine into the affairs of another related company in a similar group. 

Section 275 of the Companies Act, 2013

Subject to the provision of Section 278, this section provides that no individual can be a director of in excess of 15 companies at any given moment. Section 279 furnishes for a discipline with fine which may reach out to Rs. 50,000 in regard of every one of those companies after the initial twenty. 

Section 299 of the Companies Act, 2013

This Section emphasises and offers weightage to the existing proposal of the Company Law Committee: “It is important to see that the general notice which a director is bound to provide for the company of his interest for a specific company or firm under the stipulation to sub-section (1) of Section 91 which is ought to be given at a gathering of the directors or find a way to verify that it is raised and read at the following gathering of the Board after it is given.  The section not only applies to public companies but also applies to private companies. Inability to consent and act in consonance to the necessities of this Section will cause termination the Director and will likewise expose him to punishment under sub-section (4). 

Section 307 & 308 of the Companies Act, 2013

Section 307 applies to each director and each regarded director. The register of the shareholders should contain in it, not just the name but also how much shareholding, the description of shareholding and the nature and extent of the right of the shareholder over the shares or debentures.

Section 314 of the Companies Act, 2013

 

The object of this section is to restrict a director and anybody associated with him, holding any business which provides compensation if the company supports it.

Section 542 of the Companies Act, 2013

Pretentious Conduct: If over the span of the winding up of the company, it gives the idea that any business of the company has been continued with goal to defraud the creditors of the company or some other individual or for any deceitful reason, the people who were intentionally aware of this and still agreed to the carrying on of the business, in the way previously mentioned, will be liable on a personal level without incurring the liabilities of the company, and will be liable in a manner as the court may direct.

In Popular Bank Ltd, it was held that Section 542 seems to leave the Court with attentiveness to make an assertion of risk, in connection to ‘all or any of the obligations or liabilities of the company’.

Judicial interpretations and pronouncements

Instances are not few in which the courts have resisted the temptation to break through the Corporate Veil. But the theory cannot be pushed to unnatural limits. Circumstances must occur which compel the court to identify a company with its members. A company cannot, for example, be convicted of conspiring with its sole director. Other than statutory arrangements for lifting the corporate veil, courts additionally do lift the corporate veil to see the genuine situation. A few situations where the courts lifted the veil are laid down below as per the following case laws:

United States v. Milwaukee Refrigerator Transit Company

In this leading case law, the U.S. Supreme Court held that where a company is solely set up to defeat the statutory norms, justify the wrongdoings of the people of the company who use this corporate entity as a vehicle for the wrongdoing, where defrauding isn’t a collateral purpose of the company but the main purpose, the law will not see the company as a separate legal entity but will see it as an association of the members that it is made up of. 

Early examples where the English and Indian Courts neglected the guidelines built up by the landmark  Salomon’s ruling are:

Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd

In a great deal of cases, it ends up being important to check the character of an organization, to check whether it is a companion or a foe of the country the business is set up in. A milestone managing in this field was spread out in Daimler Co Ltd v Continental Tire and Rubber Co Ltd. The facts of the case are referenced below: 

An organization was set up in England and it was set up to sell tires which were thus made by a German organization in Germany. Most of the control in the British organization was held by the German organization. The holders of the rest of the shares with the exception of one, and every one of the chiefs were German, dwelling in Germany. In this way the genuine control of the English organization was in German hands. During the First World War, the English organization started an activity to recover an exchange obligation. What’s more, the inquiry was whether the organization had turned into an adversary organization and should, accordingly, be banned from keeping up the activity. 

The House of Lords laid out that an organization consolidated in the United Kingdom is a lawful entity. It’s anything but a characteristic individual with brain or inner voice. It can nor be anyone’s companion nor foe yet it might accept a foe character when people in ‘true’ control of its issues are inhabitants in any adversary nation or, any place the occupants are, are acting under the control of the foes. Just in case the activity had been permitted, the organization would have been utilized as a means by which the motivation behind offering cash to the foe would be practiced. 

That would be incredibly against open arrangement. But in case there was no such fear, the courts may decline to tear open the Corporate Veil.

People’s Pleasure Park Co v. Rohleder

In People’s Pleasure Park Co v Rohleder, certain terrains were moved by one individual to another interminably ordering the transferee from offering the said property to hued people. He moved the property to an organization made only out of Negroes. 

An activity was started for dissolution of this movement on the ground that every one of the individuals from the organization being Negroes, the property had, in break of the confinement, go to the hands of the hued people. The court rejected the contention and held that the individuals exclusively or all in all are not the partnership, which “has a particular presence separate from that of its investors.

Dinshaw Maneckjee Petit, Re.

The court has the ability to slight and infer the corporate substance in case that it is utilized for tax avoidance purposes or to go around expense commitment. An unmistakable and appropriate description of this situation is given in Dinshaw Maneckjee Petit, Re. The assessee was an affluent man getting a charge out of tremendous profit and intrigue pay. He shaped four privately owned businesses and concurred with each to hold a square of speculation as an operator for it. Pay was credited in the records of the organization yet the organization gave back the sum to him as an imagined advance. 

Further, he isolated his pay into four sections in an attempt to lessen his assessment obligation. It was held that the organization was shaped by the assessee absolutely and basically as a method for maintaining a strategic distance from super-charge and the organization was just the assessee himself. It did no business however was made essentially as a legitimate substance to apparently get the profits and interests and to hand them over to the assessee as imagined credits.

Government Companies

An organization may some time be viewed as an operator or trustee of its individuals or of another organization and may, accordingly, be esteemed to have lost its distinction for its head. In India, this inquiry has regularly emerged regarding Governmental organizations. Countless privately owned businesses for business purposes have been enrolled under the Companies Act with the president and a couple of different officials as the investors. 

The undeniable preferred position of framing an administration organization is that it gives the exercises of the State “a tad bit of the opportunity which was appreciated by private partnerships and the legislature got away from the standards which hampered activity when it was finished by an administration division rather than an administration enterprise. At the end of the day, it gave the administration portion of the robes of the person”. 

So as to guarantee this opportunity, the Supreme Court has repeated in various cases that an administration organization isn’t an office or an augmentation of the state. It’s anything but a specialist of the State. As need be, its representatives are not government workers and right writs can’t issue against it. In one of the cases, the court commented: 

“The organization being a non-statutory body and one consolidated under the Companies Act there was neither a statutory nor an open obligation forced on it by a resolution in regard of which requirement could be looked for by methods for the writ of Mandamus”.

The Madhya Pradesh High Court regarded a Government company to be a separate entity for the purpose of enabling a Development Authority to subject it to development tax. The assets of a Government company were held to be not exempt from payment of non-agricultural assessment under an AP legislation. The exemption enjoyed by the Central Government property from State taxation was not allowed to be claimed by a Government company. 

Gilford Motor Co v Horne.

The corporate entity is wholly incapable of being strained to an illegal or fraudulent purpose. The courts will refuse to uphold the separate existence of the company where the sole reason of it being formed is to defeat law or to avoid legal obligations. Some companies are just set up simply to defraud their customers or to act in a way which is against the statutory guidelines. This was clearly illustrated in the landmark ruling Gilford Motor Co v Horne. The case of the facts are laid out below:

The litigant was selected as an overseeing chief of the company of the plaintiff depending on the prerequisite condition that he will not, whenever he will hold the workplace of an organisation in which he will oversee the  executive work subsequently, open a business similar to the one which he was presently leaving or give the clients of the previous. His work was resolved under an understanding that is mentioned above. In the blink of an eye thereafter he started a business in the name of his wife the role of which was exactly what he had been prohibited to do according to the aforementioned contract. The new business was definitely a competing business and it was soliciting the customers of its previous business which was clearly a provision that was going against what he had agreed to before he left the job in the previous company.It was held that the organization was clearly based on conflicting terms that the defendant had agreed upon.

The respondent organization was an insignificant channel utilized by Horne to empower him, for his very own advantage, to acquire the upside of the clients of the offended party organization, and that the litigant organization should be limited just as Horne. 

Where an individual obtain cash from an organization and put it in offers of three distinct organizations in all of which he and his children were the main individuals, the loaning organization was allowed to join the advantages of such organizations as they were made uniquely to dupe the loaning organization.

Re, FG (Films) Ltd

In this case, the court would not propel the leading group of film censors to enlist a film as an English film, which was in truth created by a ground-breaking American film organization for the sake of an organization enrolled in England so as to dodge certain specialized troubles. The English organization was made with an apparent capital of just a mere 100 pounds, comprising of 100 shares of which 90 were held by the American president of the organization. The Court held that the real producer of the movie was the American organization and that it would be a sham to hold that the American organization and American president were simply operators of the English organization for delivering the film.

Jones v. Lipman

In this case, the merchant of a real estate property tried to dodge the particular execution of a contract for the clearance of the land by passing on the land to a company which he shaped for the reason and along these lines, he attempted to abstain from finishing the property deal of his home to the offended party. Russel J. depicting the company as a “devise and a hoax, a veil which he holds before his face and endeavors to stay away from acknowledgment by the eye of equity” and requested both the litigant and his company explicitly to fulfil the obligations of the contract to the offended party. 

Tata Engineering and Locomotive Co. Ltd. State of Bihar

In this case, it was expressed that a company is likewise not permitted to file a case in the name of fundamental rights by calling itself a collection of individuals who possess the fundamental rights.  When a company is framed, its business is the matter of an incorporated body therefore shaped and not of the people that it is composed of and the privileges of such body must be made a decision on that balance and can’t be made a decision on the supposition that they are the rights owing to the matter of the individual that are a part of the organisation.

N.B. Finance Ltd. v. Shital Prasad Jain

In this case, the High Court of Delhi allowed to the offended party organization a stay order which restrained the company of the defendant from alienating the properties that they owned on the ground that the defendant had borrowed money fraudulently from the plaintiff companies and the defendant had purchased properties in the name of the defendant companies. The court in this case did not award protection under the piercing of the corporate veil.

Shri Ambica Mills Ltd. v. State of Gujarat

Although the names of the petitioners of the case were not expressly mentioned, they were still held to be the parties to the proceedings. Also the managing directors couldn’t be said to be complete outsiders to the company petition although they in their individual limit might not be parties to such proceedings but in their official capacities, they are certainly capable of representing the company in such matters.

Approach of the Indian Courts in the 21st Century  

Subhra Mukherjee v. Bharat Coking Coal Ltd.

In this situation, Hoax or façade is being talked about. A private coal company sold its real estate to the spouses of executives before nationalization of the company. Truth be told,archives were tweaked and back-dated to corroborate that the deal of the selling of the real estate to the wives of the directors was before nationalization of the company. Where such exchange is claimed to be a hoax and deceitful, the Court was supported in piercing the veil of incorporation to discover the genuine idea of the exchange as to realize who were the genuine parties to the deal and whether it was real and in good faith or whether it was between the married couples behind the façade of the different entity of the company.

Bajrang Prasad Jalan v. Mahabir Prasad Jalan

This case is about a Subsidiary Holding Company. The court, to consider an objection of mistreatment held that the corporate veil can be lifted in the instances of not simply of a holding company, but also its subsidiary when both are belonging to the parent organisation.

Singer India v. Chander Mohan Chadha

The idea of a corporate entity was advanced and endorsed to empower the trade,commerce and business scene and not to cheat the general population. In case where the court finds out that the corporate entity was not properly made use of, was set up only for illegal purposes, the court has every right to pierce the Veil and therefore see who actually was behind the Veil using the company as a vehicle for undesirable purposes.

Saurabh Exports v. Blaze Finance & Credits (P.) Ltd. 

Defendant no. 1 was a private limited company. Defendant no. 2 and 3 were the directors of that company. Defendant no. 4 was the husband of Defendant-3 and the sibling of Defendant -2. On the basis of alleged representation of Defendant-4 that Defendant-1 company was welcoming momentary deposits at great interest rates, the offended party deposited a sum of Rs. 15 lakhs in the company for a time of six months. At the point when the company neglected to pay the sum, the offended party sued it for the said sum alongside interest. Defendant-2 and Defendant-3 denied their risk on the grounds that they couldn’t have been made personally liable under any circumstance as the sum was deposited in the name of the company and not in the name of the directors of the company.

D-4 denied the risk on the ground that it had nothing to do with him as he was neither a director of the company nor a shareholder of the company so he had absolutely no role whatsoever in the case. It was held that Defendant-3 being a housewife had little task to carry out and hence couldn’t be made at risk. The offended party was looked to be put under the cloak of a corporate entity of Defendant-1 and, in this way, the corporate veil was lifted contemplating that Defendant-1 was just a family setting of the rest of the defendants. Defendant-2 was maintaining the business for the sake of the company. So Defendant-1 and Defendant-2 were both liable on a personal level.

Universal Pollution Control India (P.) Ltd. v. Regional Provident Fund Commissioner

This is an instance of ‘default in payment of the provident fund of the employee’’- Certain sum was expected and payable to the provident fund office by the sister concern of the company of the plaintiff, a demand was made by the defendant from the company of the petitioner on the ground that both the companies had two directors in common. It was held that the dispute raised by the respondent that the Court should lift the corporate veil and affix the obligation on the applicant was with no benefits and was unjustifiable. Both the companies were distinct legal entities under the provisions of the Companies Act and there was no arrangement under the Provident Fund Act that a risk of one organization can be secured on the other organization even by lifting the corporate veil, which is why this exercise would have been considered futile.

Richter Holding Ltd. v. The Assistant Director of Income Tax

Richter Holdings Ltd., a Cypriot company and West Globe Limited, a Mauritian company bought all shares of Finsider International Co. Ltd. (FICL), a U.K. company from Early Guard Ltd. another U.K. company. FICL held 51% shares of Sesa Goa Ltd. (SGL), an Indian company. The Tax Department issued a show cause notice to Petitioner claiming that the Petitioner had by implication obtained 51% in Sesa Goa Ltd and was, subsequently, obligated to deduct tax at source before making installment to Early Guard Limited. 

The Income Tax Department battled that according to Section 195 of the Act, the Petitioner is at risk to deduct tax at source in regard of installment made for the buy of the capital resource. The High Court of Karnataka held that the Petitioner should answer to the show-cause notice issued by the Tax department and urge every one of their disputes before it. The High Court additionally stressed that the reality of finding authority (Tax Department) may lift the corporate veil to investigate the genuine idea of the exchange to find out the fundamental actualities. 

The angle that merits more noteworthy consideration is that the Karnataka High Court shows a distinct fascination for lifting the corporate veil. This has various ramifications. Initially, the Richter Holding Case broadens significantly further the extent of the standards laid out in the Vodafone Case. For instance, in the Vodafone case, the Bombay High Court did not consider lifting the corporate veil to force taxation if there should arise an occurrence of transfers made by indirect measures.

Secondly, it isn’t obvious from the judgment itself whether the tax experts propelled the contention with respect to lifting the corporate veil. For the most part, courts concede to the sacredness of the corporate structure as a different legitimate personality and are moderate to lift the corporate veil, as proven by Adams v. Cape Industries , except if one of the built-up grounds exist.

Balwant Rai Saluja v. Air India Ltd. (2014)

A three-judge Supreme Court bench recently addressed a number of significant issues regarding whether, if ever, it is permissible to lift the corporate veil in its decision in Balwant Rai Saluja v. Air India Ltd. (2014). It is significant to take into account Lord Sumption’s recent ruling in the UK case of Prest v. Petrodel Resources Ltd. (2013) in this context. The Indian Supreme Court’s acknowledgement that the corporate veil should rarely be lifted is commendable, even though it does not support exactly the same standards as did Lord Sumption.

The Supreme Court properly notes that the six criteria outlined by Munby J. in Ben Hashem v. Ali Shayif (2008) have come to dominate the law on the issue, which was also approved by Lord Sumption in the Prest case. This is good news because it indicates that the Supreme Court is indirectly challenging the far broader justifications for lifting the veil in the past.

Using the “piercing the veil” doctrine, a court may overlook a company’s distinct legal identity and hold those who have actual control over it accountable. However, this principle has been and should be used sparingly, that is, only in situations where it is obvious that the firm was merely a camouflage or sham that the people in control of the said corporation purposefully formed in order to avoid liability.

The veil must be lifted sparingly by the courts, and the current facts would not be a suitable instance in which to do so. Therefore, only having ownership or control is insufficient to lift the veil of incorporation. It must be proven that Air India’s interference and improper behaviour deprived the appellants-workers in this case of their legal rights.

Whether arbitral tribunals have the power to lift the corporate veil

The issue of the arbitrator’s authority to lift the corporate veil has been addressed in a number of cases during the past few years by the Supreme Court, the High Courts of Bombay and Delhi, and other courts. In the absence of a ruling by the full or constitutional bench of the Supreme Court, the case law has been contradictory in how it has addressed the issue.

According to chronological order, the case of Indowind Energy Ltd. v. Wescare (I) Ltd. (2010) was the first to have briefly addressed the issue. The Court, in this case, recognised that Indowind, which was not a party to the arbitration agreement but was being forced to arbitrate by Wescare, did not act in a way that indicated its assent to engaging in the arbitration. The existence of a legitimate arbitration agreement between Subuthi and Wescare was not regarded as important. In this instance, the Court observed that the requirements for lifting the corporate veil had not been satisfied. It was emphasised that non-signatories could not be bound by an arbitration agreement, despite the fact that the ability of an arbitrator to lift the corporate veil was not addressed.

The judgement in Purple Medical Solutions (P) Ltd. v. MIV Therapeutics Inc. (2015) was the next case to explore how lifting the corporate veil intersects with the Company Act and the Arbitration Act. Neither one of the two respondents in the current case was a signatory to the arbitration agreement with the petitioner, but the petitioner nonetheless requested the appointment of an arbitrator on their behalf. The second respondent sought to be charged due to the fact that the first respondent simply served as the second’s corporate guise and carried out all transactions on the second’s behalf. The second respondent’s corporate veil was lifted by a single Supreme Court judge, who also chose an arbitrator on its behalf. It’s crucial to remember that the court lifted the corporate veil in this case and then appointed the arbitrator after doing the same. While this case clarifies the law about whether a court can remove the corporation’s veil during an arbitration procedure, it says nothing about an arbitrator’s ability to do the same.

By far, the most significant case addressing the issue at hand is Sudhir Gopi v. Indira Gandhi National Open University (2017), and it merits a more thorough study. The judgement begins by stating that an arbitral tribunal is a creation of consent and that the parties’ agreement limits its jurisdiction. This restricted jurisdiction does not give it the authority to arbitrate on behalf of someone who hasn’t given their consent. With this limited justification, the Court came to the conclusion that the arbitral tribunal lacked the authority to lift the corporate veil. According to the ruling, the court may bind non-signatories to an agreement under specific conditions. It references the Chloro Controls ruling as it cites the two scenarios, implied consent and contempt for corporate personality, that were previously explored. This is done with the goal of highlighting the fact that courts have the authority to bind non-signatories when certain requirements are met. The case cites ONGC v. Jindal Drilling & Industries Ltd. (2015) as support for the finding that the arbitral tribunal’s authority is limited and that only a court, not an arbitral tribunal, has the authority to lift the corporate veil. Other cases include Great Pacific Navigation (Holdings) Corp. Ltd. v. M.V. Tongli Yantai (2011) and Balmer Lawrie v. Balmer Lawrie Workers’ Union (1985). The Court then went on to draw comparisons between the facts of this case and several other cases on related issues before restating that the Arbitral Tribunal would not have the authority to lift the corporate veil.

A different Delhi High Court single-judge bench, however, reached a different conclusion and upheld the Sudhir Gopi decision as per incuriam. The High Court upheld relief in GMR Energy Ltd. v. Doosan Power Systems India (P) Ltd. (2017) by rejecting the argument that the Arbitral Tribunal has the authority to lift the corporate veil. It took note of the types of conflicts that were determined to be unresolvable by arbitration in A. Ayyasamy v. A. Paramasivam (2016) and pointed out that uncovering the corporate veil did not fit under any of the listed categories. The Court concluded its observation on this specific matter by noting that the Arbitral Tribunal and the court can both decide on the matter of alter ego.

In a recent judgement by the Delhi High Court, Delhi Airport Metro Express Private Limited v. Delhi Metro Rail Corporation Ltd. (2021), the Delhi Metro Rail Corporation’s corporate veil was recently broken or lifted by the Hon’ble High Court in an intriguing ruling. The Union Ministry of Housing and Urban Affairs and the Government of the National Capital Territory of Delhi (Union Government and GNCTD, respectively) were found to be the two major shareholders in DMRC, and the Court determined that they are each responsible for paying off DMRC’s debt as a result of an arbitral award that was made against it. The DMRC needed to be able to discharge its liabilities that had developed after it received an arbitral decision, so the Hon’ble High Court of Delhi was petitioned to weigh in on whether the corporate veil-piercing theory needed to be used. The Hon’ble High Court of Delhi also decided whether relief might be requested in an execution procedure against a party who wasn’t a party to the original award or decree. The High Court then gave its opinion on the relevant situation, defending the necessity of applying the corporate veil principle in the absence of any allegations of deception, façade, or evasion of taxes or any other duties. According to the Court, the notion of piercing the corporate veil was not only appropriate in the aforementioned situations but could also be used when equity and the ends of justice were called for.

However, in the absence of a ruling by a full or constitutional bench of the Supreme Court, the legal position of the proposition is still up for debate. It is essential that the government take the initiative and publish guidelines or rules that make it clear that arbitrators have the required authority to decide on matters of company law.

Conclusion

It ought to be noticed that the rule of Salomon v. A. Salomon and Co. Ltd. is as yet the standard and the occasions of piercing the veil are the exemptions to this standard. The rule that a company has it’s very own different legitimate character of its own finds a significant spot in the Constitution of India too. Article 21 of the Constitution of India, says that: No individual will be denied of his life and individual freedom with the exception of as per the procedure set up by law. 

Under Article 21 a company likewise has the option to live and individual freedom as an individual. This was set down on account of Chiranjitlal Chaudhary v. Association of India where the Supreme Court held that fundamental rights ensured by the constitution are accessible not simply to singular natives but rather to corporate bodies also.

Along these lines, an organization can possess and sell properties, sue or be sued, or carry out a criminal offense in light of the fact that the partnership is comprised of and kept running by individuals, going about as operators of the company. It is under the ‘seal of the company’ that the individuals or shareholders submit misrepresentation.

It is conspicuously clear that incorporation of the company does not cut off personal liability at all times and in all circumstances. The sanctity of a separate corporate entity is upheld only in so far as the entity is consonant with the underlying policies which give it life. 

---

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/lawyerscommunity

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.