The Doctrine of Lifting the Corporate Veil: Origin, Evolution, Challenges

3rd March, 2022 - 12:33 pm Categories: Corporate Law 0 Comments

ORIGIN – THE DAWN OF THE DOCTRINE

The theory of separate legal personality of a company is the one which lays the foundation and is a basic principle of corporate jurisprudence in modern legal systems all over the world. This theory gives an identity to the company which is distinct from its shareholders, members, or founders, through which the company acquires the status of an artificial or a juristic person.

The fountainhead of the separate legal entity principle was established by Salomon v Salomon & Co Ltd where the House of Lords enunciated that the company at law is altogether a different person from the subscribers of the memorandum, which means that the liability of the company will not be the liability of its members. The same principle was endorsed by the Hon’ble Supreme Court of India in the case of Kondoli Tea Co. Ltd., wherein it was held that there exists a veil of incorporation between the shareholders of a company and the company itself. The same has been reiterated in various other cases such as Lee v Lee’s Air Farming Ltd, Macaura v Northern Insurance Co. Ltd., et al

However, this theory cannot be pushed beyond its limits. After all, for a while, by fiction of law, a corporation is a distinct entity, yet in reality, it is an association of person who are in fact the beneficiaries of the corporate property. Therefore, there are situations where the court will lift the veil of incorporation in order to examine the realities which lay behind. Sometimes, this is expressly authorised by statute and sometimes the court will lift the veil of its own volition

Which brings us to the Doctrine of Lifting the Corporate Veil which is essentially piercing or lifting the veil of incorporation between the company and its shareholders to identify and recognise the true brain behind the operation in cases where illegal actions have been committed. “The lifting of the corporate veil of a company as a rule is not permissible in law unless otherwise provided by clear words of the statute or by very compelling reasons.”

EVOLUTION – THE JURISPRUDENCE OF THE DOCTRINE

Statutory recognition has been given to the lifting of Corporate Veil as the various provisions of the Companies Act 2013, Income Tax Act, 1961, and the Foreign Exchange Regulation Act, 1973 enumerate the circumstances in which the concept of distinct entity shall be ignored to reach the real forces of action. Within the Companies Act, the following sections deal with this concept:

Section 12 – Misdescription of Name

Section 34 & 35 – Misstatements in Prospectus

Section 39 – Failure to return application money

Section 76A – Punishment for contravention of section 73/76

Section 219 – For facilitating the task of an inspector appointed under section 210/212

Section 339 – Fraudulent Conduct

There have been several judicial pronouncements and interpretations which has led to the enriching of its jurisprudence but has also exposed different challenges.

The case of Dinshaw Maneckjee Petit, re is an interesting illustration as to judicial interpretation of this doctrine of piercing of corporate veil, – where the facade of companies was ostensibly created to commit tax evasion. In Gilford Motor Company v Horne the formation of the company was a mere “cloak or sham” to break a non-compete clause, which was declared to be fraudulent. Avoiding a specific performance of the contract has led to formation of more fraudulent companies as can be seen in Jones v Lipman. Any sort of economic offence compels the courts to peep behind the veil as declared in Santanu Ray v Union of India or in situations where the company is used for some illegal or improper purpose like syphoning company funds or in determining the enemy character of the company in case it is run by officials of other countries, or forming subsidiaries to act as an agent or where the company is incorporated to avoid certain welfare legislation – all of these instances make it permissible for the court to pierce through the corporate veil.

CHALLENGES – PROBLEMS AND WHAT LIES AHEAD

It must be noted how there is no bright line to demarcate circumstances which would permit the court to pierce through the veil; it has been left to the discretion of the Court which decides after looking at varying scenarios. In LIC of India v Escorts Ltd., it was signified that “there should not be an exhaustive list of situations where the corporate veil is permitted to be lifted rather it should rest on a case-to-case basis” and in State of Uttar Pradesh v Renusagar Power Co. SC said, “its frontiers are unlimited.”

This condition leaves a lot of room for varying degrees of interpretation as to what should pressure the courts to look behind the iron clad curtain of a corporate veil and results in inconsistent application of the same statutory rule. The author believes that since each new case opens up avenues for judicial discretion which continue to broaden the horizons of this ever-advancing field of piercing corporate veil, there needs to be some control extended over this state of affairs. To remove ambiguity and subjective interpretation of the law, the author suggests that doctrine should be subjected to bright line tests which can assist in clearly defining objective standards which shall further contribute vertically to its jurisprudence rather than horizontally.

Conclusively, the doctrine of lifting of the corporate veil is a flexible tool which assists in administering justice as it expounds on one of the aspects of law that an individual must not benefit from their own wrongdoings. The incorporation of a veil is imperative to the life of any company as it forms the basic foundation of the same, but its lifting is also sometimes imperative to ensure that there are no misdeeds occurring in the camouflage of a body corporate. While the courts of law have tried for many years to refine this doctrine, there is a need for stricter application and to set some objective standards so as to avoid any uncertainty of judicial discretion.

Author: Diksha Pherwani – a student of law at K.L.E. Society’s Law College, Bengaluru, in case of any queries please contact/write back to us via email vidushi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.