Analysis of the theory of corporate veil lifting

Introduction

A company is an independent legal person with a unique identity under the laws of our country. This indicates that it can face legal obligations and conduct its unique legal privileges. A company manages its affairs through its human representatives, such as directors, promoters, and members, even if it has its own legal personality. Even though a company’s agents are the core of its operations, the company’s identity is separate from others.

It was concluded in the fundamental verdict of Saloman v. Saloman Co. Ltd[1]. that the “company is an independent legal entity,” with a character of its own that is separate and independent from that of its members and stockholders. Around the world, multiple common law and civil law nations have accepted this well-established idea. According to the case, an incorporated company is considered an “artificial person” and needs to be managed differently from its staff. The business can file a lawsuit or be sued, and it has specific rights and responsibilities of its own. The companies also benefit from an ongoing succession due to this “corporate personality” rule[2].

A company is considered unique if it possesses a legal entity apart from its human employees. A Corporate Veil is a specific concept that distinguishes the company’s liabilities from those of its members. The rights, obligations, and duties of the Company are separated from those of its workers by a veil. Humans work for the corporation behind this imaginary curtain, which serves to hide the faces of its members, which they occasionally use as a justification to engage in criminal activity. The idea of lifting the corporate curtain emerges whenever such human activity is motivated by malicious intent to deceive the business, its investors, and its business partners[3].

Interpretation of Piercing or Lifting the Corporate Veil

Yet, humans started openly hiding corporate personalities as a cover for dishonesty or unethical behavior. Therefore, it turned vital for the legal system to remove the company veil and examine the individuals truly taking advantage of the corporate fraud, rather than the corporation itself.

Neglecting the corporate image and examining the actual individuals in charge of the business is known as lifting the corporate veil. In other words, the people involved will not be permitted to hide beneath the company’s image in cases where the legal company is used unlawfully or dishonestly. The court will utilize the concept of “lifting or breaking through the corporate veil” in this scenario, breaking through the corporate shell. Furthermore, although a corporation is a separate legal entity, in practice it is a collective of people who jointly own all of the company’s assets[4].

A corporation is regarded as a legal entity in the case of the United States versus. Milwaukee Refrigerator Company[5]. However, it is considered a community of people when it is used to undermine convenience for society, defend crime, defend wrongdoing, or prevent fraud. The court highlighted in Little Woods Mail Order Stores Ltd. versus Inland Revenue Commissioners[6] that the limited partnership doctrine should be closely monitored since courts frequently lift the veil to see the internal operations of the company in question.

In a landmark decision in L.I.C. India v. Escorts Ltd. & Other[7]s, the Honourable Supreme Court of the nation upheld the principles established in the Salmond case. However, it additionally set up some exceptions that allow the court of appeal to disregard a company’s corporate personality rule and identify and punish the true offender. It is assumed that “there lies a veil separating the company from its members” because the company and the employees are separate entities. Employees of the firm frequently abuse this veil to engage in fraud or other illegal activity and to shield themselves from legal sanctions. The court’s sole option in such scenarios is to pierce the corporate veil to identify the actual member who is guilty. The suspect is entitled to be prosecuted for his dishonesty or damage by the legal procedures once the court lifts the veil and the true culprit has been found.

A company operates as an independent legal entity.

As demonstrated by the important ruling in Salomon vs A. Salomon and Company. Ltd[8]., a company is an independent legal person from its investors. At the focal point of the conflict was Mr. Solomon, an owner of the footwear and boot-making company. As Salomon & Company Limited. was established, seven shareholders included Solomon, his wife, along with a baby girl and a quartet of boys. The company paid 39,000 pounds for Salomon’s business, using cash, entirely paid shares, and debentures as purchase price. After a year, the business started having problems, and liquidation steps were commenced. Since the Act simply necessary seven members to own no less than one share each, the members of the House of Lords jointly decided that the corporation was lawfully set up. The company has independent assets from its shareholders, a unique name and seal, and an entity that separates itself from its stockholders. Members’ accountability is limited by the amount of money they have contributed.

A legal service contract was established in Lee versus Lee’s Air Farming Limited[9]., confirming that Lee was an employee for the Act. The decision gave rise to the idea of one individual serving as simultaneously a director and a worker of the same business.

Latham CJ held in The King versus Portus; an ex-prate Federation Clerks Unions of Australia[10] that the business is a separate legal entity from its stockholders and that the latter are not responsible for the obligations of the former.

Motivation for proposing the idea of lifting the corporate veil.

Numerous judgments have impacted how judges have interpreted the corporate veil-lifting concept.

A corporation that was founded to avoid taxes is the Denshaw Maneckjee Petit[11] case. The establishment of a business was regarded as fraudulent in Gilford Motor Business v. Horne[12] because it constituted a “cloak or sham.” The establishment of fake businesses is demonstrated in Jones v. Lipman[13]. Courts may lift the corporate veil in matters involving economic offenses, improper or unlawful use of a corporation, or evasion of welfare laws, according to Santanu Ray v. Union of India[14].

These verdicts allow judges to see past the corporate veil and handle matters like money laundering, identifying the unfriendly nature of a business managed by foreign officials, and establishing subsidiaries to function as agents[15].

Legal Clauses or Justifications for Lifting the Veil

1. Fraud or inappropriate behavior– In cases of fraud or unlawful conduct, judges are more eager to lift the veil of the corporation. They prevent fraud from being fuelled by the Salomon principle. Two significant cases involving fraud exclusion are Jones versus Lipman[16] and Gilford Motor Co. Ltd. versus Horne[17]. In the matter, Gilford Motor Company Limited versus Horne, Mr. Horne, a former Gilford Motor Company employee, formed a limiting firm in his wife’s name to attract clients. Although the firm filed a lawsuit against him, the Court of Appeals determined that the company was merely an umbrella for his commercial activity. Mr. Lipman transferred his real estate to a company in Jones vs. Lipman intending to skip a specific performance requirement. Citing the rulings in Gilford versus Horne, the Divisional judge granted Mr. Lipman and the firm-specific performance. In cases involving fraud or inappropriate behavior, the courts were considered more willing to uplift the corporate veil.
2. For gain of income– Corporate companies utilized for evasion of taxes or escape may be disregarded by the Court. In Dinshaw Maneckjee Petit’s case[18], for instance, a rich man set up four private businesses to obtain interest and dividends; the companies credited the assessor’s accounts with the earnings but returned it as a fictitious loan. Lower his tax obligation, his assessor split his earnings into four categories. But the court decided that the corporation was no more than an assessee himself and was established only to escape super tax. The corporation was established to receive dividends and interest but did not conduct any business.
3. Enemy Nature– In Daimler Co. Ltd. versus the Continental Tyre and Rubber Company. Limited[19], the court could declare a company an enemy depending on the characteristics of the people with actual command. The firm was established in the United Kingdom to distribute the tires manufactured in Germany’s regime via a German company, with a considerable proportion of shares possessed by the German people. During the First World War, the English firm attempted to recover its trade loans, however, was regarded as an alien firm and the repayment might be considered as trading with the enemy.
4. The firm is a sham– When a firm is merely a front or a fake, the courts also pierce the veil. In Gilford Motor Company, Ltd. versus Horne[20], Mr. Horne was an employee of Gilford Motor Company, and it was expressly stated in his employment contract that he would not be permitted to approach clients of the business. Stay clear of this situation, Mr. Horne took Gilford Motor Co. Ltd.’s client and established a business in his wife’s name. The company filed a lawsuit against him after learning about this. The court considered the corporation as nonsense and declared definitively that it was nothing more than a case of fraud, hiding the business under a false name.
5. A company ignoring its legal responsibilities– The Court may ignore the legal status of the firm and continue as though it had no existence where an incorporated company is being used to avoid its legal responsibilities.
6. Single Monetary Group– As demonstrated in H.N. Food Products, Ltd. versus Tower Hamlets[21], courts sometimes hold the authority to break the corporate veil in order to investigate the economic reality of a collection of businesses. Because the three subordinate companies were seen as belonging to a single business entity or group and were eligible for compensation, the Court of Appeal deemed the current case suitable for piercing the corporate veil. This decision illustrates how courts can disregard Salomon’s position when it is fair and reasonable.
7. Interests of the Public– In order to safeguard the public interest and stop actions that go against that, the courts have the authority to lift the veil. Although there are no particular criteria for lifting the veil, the courts must decide on this one as doing so is the most “just” course of action. Therefore, the courts overlook form and consider content when there exists an issue with the interests of the public. The Supreme Court used the public interest as a justification for raising the corporate veil within Government of Rajasthan and Others. versus Gotan Lime Stones Khanji Udyog Private Limited and Ors[22]., observing that the corporate veil might be lifted whenever the public interest so demands.
8. Charity or Agencies– A company that represents its shareholders is responsible for its actions. The details of each case determine whether a business works as a mediator for its shareholders. A company from the United States funded a British production in India under the false identity of an American firm within the G. Film Limited[23]. Case. The Court of Trade of the United Kingdom refused to recognize the movie as a British film, and the chief executive of the American business owned 90% of the capital. Since the British firm served as the American corporation’s candidate, the decision was lawful.

Laws Regulating the Lifting of the Veil

A company’s officials and members, even the ones who are in default, may be held liable for wrongdoing or illegal offenses under the Companies 2013 Act. The Act also permits tribunals and courts to ignore a company’s corporate identity when dealing with fraud or harm. In the case that a company is established by providing inaccurate or misleading information or by purposefully hiding essential details or paperwork, the court might act and issue orders regulating the management of the firm. In addition, the courts may order the company’s winding up, withdraw the company’s title from the registry of companies, or adopt any other decision that would benefit the company, its shareholders, and its creditors.

Under Section 447 of the Act, the promoters, initial directors, and declarations may be held liable for any wrongdoing, fraud, or illegal act committed by any individual related to the business. Section 34 highlights the criminal penalty for making misleading and false statements in the proposal, whereas Section 35 highlights the civil penalties.

Once every debt has been paid off and 75% of the members have approved may a company apply to have its name removed from the official list of companies per Section 248(2). The executives in control of the company’s administration will be held responsible for the contents of the claim either jointly or separately, and they possess the authority to propose that those who filed the fraud petition face charges. The Act’s Section 339 lists penalties resulting from dishonest company behavior.

Lifting the veil of business for a company’s profit.

As illustrated by UP v. Renusagar Electricity Company[24], the Supreme Court of India has lifted the veil of corporate immunity for the advantage of businesses. According to the judgment in the case, Hindalco Limited, a division of Renusagar Limited, was qualified for lower duty rates on electricity produced using its energy source. The court decided in Hindalco Limited’s favor, finding that the two businesses were interdependent and could be regarded as one. Due to the lifting of the corporate veil, Hindalco Limited was able to take advantage of the UP-Electricity Duty Act. The apex court has applied the corporate veil-lifting principle for the company’s benefit in several cases, including this particular one.

Indian courts place considerable value on keeping a company’s identity distinct from that of its board of directors and shareholders. The Vodafone International Holding B.V. versus Union of India[25] and several other 35 cases made this obvious. Vodafone purchased the CGP Investments, which was controlled by Hutchinson, a Hong Kong-based corporation that owned 67 percent of Hutchison-Essar Limited., Hutchinson’s Indian mobile business. Vodafone was illegally withholding tax because of Hutchinson’s profits in India, according to the Indian tax authorities. The corporate veil is being lifted in international financial transactions and tax matters, according to the Bombay High Court’s decision in support of the tax authorities.

Conclusion

A company may carry legal obligations and enjoy special privileges since it is a separate legal organization with its own identity. It preserves its legal personality while managing its financial operations through human representatives, including members, directors, and promoters. A distinct company has a Corporate Veil, which is a legal entity distinct from its human workers. This idea distinguishes the rights, responsibilities, and duties of the employees from those of the company’s members, so separating the latter’s obligations from the former’s liabilities.

A well-known exception to the idea of a corporation’s separate legal existence is the theory of lifting the veil over a corporation, which is a foundation of company law. In the case of Balwant Rai Saluja versus Air India[26], the Supreme Court observed that the “corporate veil” can only be pierced when the corporation has been used as a shield to avoid responsibility and when the intention is to correct a wrong committed by the managing authorities.

[1] Salomon v Salomon & Co. Ltd. (1897) A.C. 22

[2]  Kumar Shubham and Kshitij Ujala ‘Lifting the Corporate Veil in India’ ( Company Law, 17 June 2021) < https://articles.manupatra.com/article-details/Lifting-the-Corporate-Veil-in-India > accessed date 04 January 2025

[3] SS Rana and Co ‘Lifting of Corporate Veil in Execution Proceedings’ < https://www.lexology.com/library/document?tk=eyJ0eXAiOiJKV1QiLCJhbGciOiJIUzUxMiJ9.eyJleHAiOjE3MzY1MTM4NjAsImRhdGEiOnsiRG9jdW1lbnRHdWlkIjoiOTU4MzU4YjEtOTk0Ny00ZTI5LTllNTgtMWRkZDhhMmNlZmFkIiwiQ29udGFjdEd1aWQiOiIwMDAwMDAwMC0wMDAwLTAwMDAtMDAwMC0wMDAwMDAwMDAwMDAiLCJCeXBhc3NMb2dpbiI6dHJ1ZX19.GzF5KKIhJ8g34hkhTLbf8-71uAXU4fttc-qb_zkGyzq3HFTiSlq1tRzGxmY2AnhUR2JnkAkknqvVaFSZr9lUSA > accessed date 05 January 2025

[4] Shivaji College ‘Lifting the Corporate Veil’ < https://www.shivajicollege.ac.in/sPanel/uploads/econtent/c54aa4c8b9289036165986aa612ae5d7.pdf > Accessed date 06 January 2025

[5] United States v. Milwaukee Refrigerator Transit Co. (1905) 142 F. 247

[6] Littlewoods Mail Order Stores Ltd. vs Inland Revenue Commissioners  (1970)75ITR327(CAL)

[7] Life Insurance Corporation of India vs Escorts Ltd. & Ors  (1986) 1 SCJ 38

[8] Ibid n1

[9] Lee v. Lee’s Air Farming Ltd. (1960) 3 All E.R. 420

[10] King v Portus; ex parte Federated Clerks Union of Australia (1949) 79 CLR 42

[11] In Re: Dinshaw Maneckjee Petit Bart vs Unknown  (1927)29BOMLR447

[12] Gilford Motor Company, Limited v. Horne(1933) Ch. 935

[13] Jones v Lipman (1962) 1 W.L.R. 832

[14] Santanu Ray vs Union of India  (1989)65COMPCAS196(DELHI)

[15] Diksha Pherwani ‘The Doctrine Of Lifting The Corporate Veil: Origin, Evolution, Challenges’ (  4 March 2022) < https://www.mondaq.com/india/shareholders/1168276/the-doctrine-of-lifting-the-corporate-veil-origin-evolution-challenges > accessed date 07 January 2025

[16] Ibid n13

[17] Ibid n12

[18] Ibid n11

[19] Daimler Company Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd. (1916) 2 AC 307

[20] Ibid n12

[21] DHN Food Distributors Ltd v Tower Hamlets London Borough Council (1976) 1 WLR 852

[22] State Of Rajasthan and Ors vs Gotan Limestone Khanij Udyog and Anr (2016) 1 WLC(SC)CVL 546

[23] Re FG (Films) Ltd (1953) 1 WLR 483

[24] State Of U.P. And Ors vs Renusagar Power Co. And Others  (1988) 3 JT 141 (SC)

[25] Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613

[26] Balwant Rai Saluja & Anr Etc. vs Air India Ltd.& Ors (2014) 2 CLR 1041 (SC