6 May 2019

By Yash Choudhary (ASC Solicitor’s & Advocate’s)

Introduction

You may inexplicably wonder at this point, what the phrase ‘lifting the veil’ is about. It refers to the situation where the judiciary has decided that separation of the personality of the company and its members is not to be maintained. “The veil of Incorporation is thus said to be lifted.”

“Sometimes the court and legislature in deference to the economic reality have ignored the corporate personality and instead looked behind the legal façade” Prof. L.C.B Gower

Example, Z Ltd. (parent company) owns all the issued share capital of three other companies, A Ltd., B Ltd. And C Ltd. These companies are known as wholly owned subsidiaries. Section 2(46) of the Companies Act, 2013 defines Holding Company/ parent company.

If Z Ltd. conducts it’s more risky or liability prone activates through A Ltd. And things go wrong the assets of Z Ltd, because it is a shareholder of A Ltd. With limited liability, in theory cannot be touched. But in certain situation legislature or court might not allow this to happen.

The basis and history of lifting the veil English Law

Since the Salomon decision the court have been called upon to apply the principal of separate legal personality in what might be called difficult situation. The concept of lifting the veil in English law can be put in three timelines.

The Classical Veil Lifting, 1897-1966

During this period the House of Lords decision in Salomon dominated. The House of Lords could not overrule itself during this period and this operated as a significant restraint of the veil lifting. During this period veil lifting occur in exceptional circumstances. The court for example in Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd (1916) lifted the veil to determine whether the company was an ‘enemy’ during the First World War. As the shareholders were German, the court held that the company was indeed ‘enemy’.

The Interventionist years, 1966-1989

By the 1960s the courts were increasingly demonstrating a tendency to free themselves from old precedence they sow increasingly unjust. In 1966 this tendency led the House of Lord to change the rule under which it had operated and allow it to change its mind and overrule itself. By 1969 Lord Denning seemed to be on a crusade to encourage veil lifting. In Littlewoods mail order stores v IRC (1969)he stated;

“The doctrine laid down in Salomon case has to be watched very carefully. It has often been supposed to the cast a veil over the personality of the limited company through which court cannot see. But that is not true. The courts can, and often do, pull off the mask. They look to see what really lies behind. The legislature has shown the way with group accounts and the rest. And the courts follow suit”

Lord Denning’s views on lifting the veil still have considerable effects DHN Food Distribution Ltd v Tower Hamlets. In Re a company (1985)the Court of Appeal stated:

“In our view the cases before and after Wallersteiner v Moir (1974)(Lord Denning) shoes that the court will use its power to pierce the corporate veil if it is necessary to achieve justice irrespective of the legal efficacy of the corporate structure under consideration.”

This represented probably the high point of the interventionist period. The court seemed to treat the separate personality of the company as an initial negotiating position. This could be overturned in the interest of justice.

Back to basics, 1989-present

The doctrine of veil lifting started to be impoverished by the court during this period. In Woolfsan v Strathelyed council stated that the one situation where a corporate veil could be lifted was whether there are special circumstances indicating that the company is a ‘mere façade concealing the true facts.’

 But the judgment of the Court of Appeal in Adams v Cape Industry Plc leaves only three circumstances when a veil can be lifted.

  • It the court in interpreting a statute or document and the statute itself is ambiguous, which would allow the court to treat a group as an entity.
  • If a special circumstance indicate that it is a mere façade concealing the true facts, the court may lift the veil.
  • The last exception is in relation to principle and agency. The parent and subsidiaries are unlikely have express agency agreement and it is even difficult to prove an implied agency. The evidence of daily control has to be established between the parent company and its subsidiaries

Lifting Veil in India

The Supreme Court in the case of Life Insurance Corporation of India v. Escorts Ltd, stated, There are certain circumstances under which corporate veil may be lifted can be categories broadly into two following heads:

 1. Statutory Provisions

 2. Judicial interpretation

Judicial interpretation

The Indian precedent judgments have enabled the courts to lift the corporate veil. The Supreme Court of India had acknowledged this principle long back. Some examples,

  • The Workmen Employed in Associated Rubber Industries Ltd., Bhavnagar v. The Associated Rubber Industries Ltd., Bhavnagar, the company in question formed a completely controlled subsidiary company which performed no business, but received dividends from the principal company. The court upon lifting the corporate veil came to the conclusion that this action was purported in order to split the dividends so that a reduced bonus amount may be given to the employees. This was found as an act in order to avoid welfare legislation and the same was identified as a valid ground for lifting the veil of incorporation.
  • In cases of economic offences, a court is unrestricted to lift the veil of corporate entity and pay regard to the economic realities behind the legal façade. In Santanu Ray v. UOI the company was alleged of violation of Section 11 of Central Excise and Salt Act. The court went on to hold that corporate veil could be lifted to know which of the directors was concerned with evasion of excise duty for reason of fraud, concealment or wilful misrepresentation or suppression of facts.

In Cotton Corporation of India Ltd. v. G.C. Odusumath laid down the rule that the courts can lift corporate veil only when provisions for the same is expressly provided within the statute book or only if there are any compelling reasons.

The Companies Act, 2013

 The act Provides for the following provisions enabling courts to lift the corporate veil.

Section 7(7) Where the incorporation of a company is effectuated by way of furnishing false information, the court may fix liability and for this purpose, the veil may be lifted.

Section 251(1) also is a penal provision. The Act asks for the submission of an application for the removal of name of the company from the registrar of the companies. Any who make fraudulent application is fixed with liability under this section.

Section 34 and 35 of the act also enable the courts to lift the veil of incorporation to fix liability. When prospectus includes misrepresentations, the court may impose compensatory liability upon the one who misrepresented.

Section 216 and 219; There might be instances where the investigators or the concerned authority or the government may have to look into the affairs of a company for the purpose of evaluating whether it is a sham and the realities under its corporate veil.

Section 339 The odds of members resorting to fraudulent conduct are high particularly during the course of winding up of a company. To assess the diagnosis of the equal, the veil may be lifted.

Section 464 of the Act imposes penal liability on the members and directors of the company when the requirements of incorporation are not complied with. Incorporation brings with it added privileges and therefore the law imposes preconditions on its enjoyments in the form of statutory compliances, the non-observance of which may attract liability. Thus the factum of manifestation of the same may be investigated into and for this purpose, the veil may be lifted.

Besides Companies Act, 2013, certain provisions of Income-Tax Act and Foreign Exchange Regulation Act, 1973 also enables the lifting of corporate veil.

Conclusion

It is profusely evident that incorporation does not interrupt personal liability. “Honest enterprise, by means of companies is allowed; but the public are protected against rogue”. The inviolability of a separate entity is upheld only in so far as the entity is consonant with the fundamental policies.

Thus those who enjoy the benefits of the machinery of incorporation have to assure a capital structure adequate to the size of the enterprise. They must not withdraw the corporate assets or mingle their own individual accounts with those of the corporation. The Courts have at times seized upon these facts as evidence to justify the imposition of liability upon the shareholders. There are categories such as fraud, agency, sham or facade, unfairness and group enterprises, which are believed to be the most atypical basis under which the Law Courts would pierce the corporate veil. But these categories are just guidelines and by no means far from being extensive.

Bibliography