1

DR. RAM MANOHAR LOHIYA

NATIONAL LAW UNIVERSITY, LUCKNOW

ACADEMIC SESSION: 2015-16

CORPORATE LAW-I : FINAL DRAFT

‘LIFTING OF THE CORPORATE VEIL’
 2

TABLE OF CONTENTS

INTRODUCTION......................................................................................................................3

DISTINCT LEGAL PERSONALITY OF A COMPANY........................................................4

LIFTING OF CORPORATE VEIL: MEANING AND SCOPE...............................................6

LEGAL STANDARDS FOR PIERCING THE CORPORATE VEIL......................................9

Under statutory provisions:....................................................................................................9

By judicial interpretation:.....................................................................................................10

LEGAL ISSUES SURROUNDING IMPOSITION OF CRIMINAL LIABILITY ON

CORPORATES........................................................................................................................15

Relevant cases when the veil was pierced to impose criminal liability on corporate:.........15

Criminal acts by subsidiary of a company:..........................................................................16

CONCLUSION........................................................................................................................18

BIBLIOGRAPHY....................................................................................................................19
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INTRODUCTION

The concept of company, being a corporate entity and one of the most advantageous forms of
business organization, is based on various concepts- existence of a 'separate legal entity'
being the most important one. By this term we mean that the company is an artificial person,
different from its members, i.e., it has its own individuality and, hence, for the acts done by
this person, others cannot be held liable. It is generally said that "members may come and go,
but the company remains forever". Now, the concept of 'separate legal entity' is based on the
presumption that the company is a totally different person in the eyes of the law, separate
from its members and owners. It can sue and be sued in its own name. This also leads to an
inference that the company can own a property in its name and can also sell one.

The assets of these natural persons cannot be brought to sale for the wrongful acts of this
'separate legal entity', unlike sole proprietorship or a partnership which are not incorporated
entities. An exception to this doctrine was created when the Courts decided that in certain
cases the members can be personally held liable for any wrongful activity which affects the
company at large, then the concept of 'separate legal entity' can be done away with to make
him liable for such a wrong committed. This phenomenon is generally called 'lifting of the
corporate veil'. This means that the Courts in certain exceptional circumstances will ignore
the principle of 'separate legal entity' and will look into as to who are the real people behind a
certain act and will make them liable, instead of the company as a whole.

The Companies Act, 2013 has incorporated various provisions which directly make the
directors liable, ignoring the concept of separate identity. Section 2(60) makes the officer-in-
default liable for his act; section 7(6) makes suppression of material facts as punishable;
section 34 makes them liable for misstatement in prospectus; section 36 makes directors
liable for inducing a person to invest money in the company; section 339 makes directors
liable for fraudulent trading and section 447 for other kinds of fraudulent activities.
 4

DISTINCT LEGAL PERSONALITY OF A COMPANY

The company as a separate entity was firmly established in the landmark decision in
Salomon v. Salomon & Co. Ltd.1 Salomon, a sole trader, sold his manufacturing business to
Salomon & Co. Ltd. (a company he incorporated) in consideration for all but six shares in
the company, and received debentures worth 10 thousand pounds. The other subscribers to
the memorandum were his wife and five children who each took up one share. The business
subsequently collapsed, and Salomon made a claim, on the basis of the debentures held, as
a secured creditor. The liquidator argued that Salomon could not rank ahead of other
creditors because, in fact, the company and Mr. Salomon were one and the same–or
alternatively, that the company carried on business on Salomon’s behalf.

On appeal, the House of Lords held that Salomon & Co. Ltd. was not a sham; that the debts
of the corporation were not the debts of Mr. Salomon because they were two separate legal
entities; and that once the artificial person has been created, “it must be treated like any
other independent person with its rights and liabilities appropriate to itself.”
In Macaura v. Northern Assurance Co. Ltd.2 the House of Lords decided that insurers were
not liable under a contract of insurance on property that was insured by the plaintiff but
owned by a company in which the plaintiff held all the fully-paid shares. The House of
Lords held that only the company as the separate legal owner of the property, and not the
plaintiff, had the required insurable interest. The plaintiff, being a shareholder, did not have
any legal or beneficial interest in that property merely because of his shareholding. In Lee
v. Lee’s Air Farming,3 the Privy Council held that Lee, as a separate and distinct entity
from the company which he controlled, could be an employee of that company so that Lee’s
wife could claim workers’ compensation following her husband’s death. In Hobart Bridge
Co. Ltd. v. FCT 4  relying on the judgment by Lord Sumner in Gas Lighting Improvement
Co. Ltd. v. IRC5, Kitto .J summarizes the position in the following manner:

“Between the investor, who participates as a shareholder, and the undertaking carried on,
the law imposes another person, real though artificial, the company itself, and the business
carried on is the business of that company, and the capital employed is its capital and not in

1
[1896] UKHL 1
2
[1925] AC 619
3
[1960] UKPC 33
4
[1951] HCA 33 
5
[1923] AC 723
 5

either case the business or the capital of the shareholders. Assuming, of course, that the
company is duly formed and is not a sham …” More recently, the High Court in Industrial
Equity v. Blackburn 6 has held that the principle operates to prevent a holding company from
treating a wholly-owned subsidiary’s profits as its own. Therefore, it can be seen that there
has been, and still is, the highest authority for the separate entity concept.

However, consideration has to be given to the limitations of the separate entity principle
which completely denies the efficacy of the corporate entity as a legal person separate from
its founders, shareholders or management. Judgements as early as the Salomon case have
indicated the recognition of exceptions to the principle of separate entity by the courts.
Recognition of the separate entity is possible provided there is “no fraud and no agency and
if the company was a real one and not a fiction or myth.” According to Lord Denning in
Littlewoods Mail Order Stores Ltd. v. IRC,7 incorporation does not fully “cast a veil over
the personality of a limited company through which the courts cannot see. The courts can,
and often do, pull off the mask. They look to see what really lies behind.” “A corporation
will be looked upon as a legal entity as a general rule but when the notion of legal entity is
used to defeat public convenience, justify wrong, protect fraud or defend crime the law will
regard the corporation as an association of persons.”

The two significant reasons as to why exceptions to the separate entity principle exist is that
firstly, although a corporation is a legal person, it cannot always “be treated like any other
independent person.” For example, a corporation is not capable of committing a tort or a
crime requiring proof of mens rea unless courts disregard the separate entity and determine
the intention held by the directors and/or shareholders of the corporation. Secondly, strict
recognition of the principle may lead to an unjust or misleading outcome if interested
parties can “hide” behind the shield of limited liability. Judicial discretion and also
legislative action allows the separate entity principle to be disregarded where some injustice
is intended, or would result, to a third party (either internal or external to the company)
with whom the company is dealing.

6
(1977) 137 CLR 567
7
 [1969] 1 WLR 1241
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LIFTING OF CORPORATE VEIL: MEANING AND SCOPE

Lifting of the corporate veil is one of the disadvantages of having incorporation. An

incorporated company is clothed with a distinct personality by fiction of law. But in reality it
is an association of persons who, in a way, are the beneficial owners of the property of the
body corporate.8 A company being an artificial person, cannot act on its own, it can only act
through the natural persons.

The theory of corporate entity of a company is still the basic principle on which the whole
law of corporations is based. But the separate personality of the company, being a statutory
privilege, it must always be used for legitimate business purposes only. Where the legal entity
of a corporate body is misused for fraudulent and dishonest purposes, the individuals
concerned will not be allowed to take shelter behind the corporate personality. In such cases,
the court will break through the corporate shell and apply the principle of “lifting or piercing
the corporate veil”, ie., the court will look behind the corporate entity.9

In the case of Salomon v. Salomon, it was decided that “in questions of property and
capacity, of acts done and rights acquired or, liabilities assumed thereby… the personalities
of the natural persons who are the company’s corporators is to be ignored.”10

The Supreme Court has adopted a similar approach and in some cases it has seen through the
corporate veil. Thus, in Central Inland Water Transport Corporation Ltd. v. Brojo Nath
Ganguly,11 the Apex Court while considering the question whether the appellant company
was an agency or instrumentality of the State for the purpose of Article 12 of the Constitution
of India, inter-alia observed: “For the purpose of Article 12, one must necessarily see
through the corporate veil to ascertain whether behind that veil is the face of an
instrumentality or agency of the State.”

Again, in State of U.P. v. Renusagar Power Company,12 the Supreme Court observed:

“The veil of corporate personality even though not lifted sometimes, is becoming more and
more transparent in modern company jurisprudence.”

8
Gallaghar v. Germania Brewing Co., (1893) 53 Minn. 214
9
Dr. N.V. Paranjape, Company Law, ( 3rdedn., Central Law Agency, 2005)
10
Lord Parker in Daimler Co. Ltd v. Continental Tyre & Rubber Co. Ltd, [1916] 2 AC 307
11
(1986) 3 SCC 156
12
AIR 1988 SC 1732
 7

This theory of corporate entity is indeed the basic principle on which the whole law of
corporations is based. Instances are not few in which the courts have successfully resisted the
temptation to break through the corporate veil.13

In the case of Lee v. Lee’s Air Farming Ltd,14 Lee incorporated a company of which he was
the managing director. In that capacity he appointed himself as a pilot of the company. While
on the business of the company he was lost in a flying accident. His widow recovered
compensation under the Workmen’s Compensation Act. “In effect the magic of corporate
personality enabled him of directors and shareholders consent to the misuse of the company’s
money, they can be prosecuted for the theft because the consent of the whole number may not
be the consent of the company.15

Although, in general, the courts do not interfere and essentially go by the principles of
separate entity as laid down in the Solomon’s case and endorsed in many others, it may be in
the interest of the members in general or in public identify and punish the persons who
misuse the medium of corporate personality.

The chief advantage of incorporation from which all others follow is, of course, the separate
legal entity of the company. However, it may happen that the corporate personality of the
company is used to commit frauds or improper or illegal acts. Since an artificial person is not
capable of doing anything illegal or fraudulent, the façade of corporate personality might
have to be removed to identify the persons who are really guilty. This is known as Lifting of
the Corporate Veil.

In a case, the Karnataka High Court has ruled that 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 such as where fraud is needed to be prevented or
trading with enemy company is sought to be defeated.16

As to when the corporate veil shall be lifted, the observations of the supreme court in Life
Insurance Corporation of India v. Escorts Ltd.17, is worth noting. While it is firmly
established ever since Salomon v. A. Saloman & Co. Limited18, was decided that a company

13
Avtar Singh, Company Law, (15thedn., Eastern Book Company, 2007)
14
1961 AC 12
15
Attorney-General’s Reference of 1984 (No 2 of 1983), (1984) 2 QB 456
16
Cotton Corporations of India Ltd. v. G.C. Odusumathd [1999] 22 SCL 228 (Kar)
17
[1986] 59 Comp. Cas 548 (SC)
18
1897 A.C. 22
 8

has an independent and legal personality distinct from the individuals who are its members, it
has since been held that the corporate veil may be lifted, the corporate personality may be
ignored and the individual members recognized for who they are in certain exceptional
circumstances.

Generally, and broadly speaking the corporate veil may be lifted where the statute itself
contemplates lifting the veil or a beneficent statute is sought to be evaded or where associated
companies are inextricably connected as to be, in reality, part of one concern.

In the case of State of U.P. v. Renusagar Power Co.19, the Supreme Court has referred
“Corporate veil” as a changing concept: “The concept of lifting the corporate veil is a
changing concept. The veil of corporate personality even though not lifted sometimes is
becoming more and more transparent in modern company jurisprudence. It is high time to
reiterate that in the expanding of horizon of modern jurisprudence, lifting of corporate veil is
permissible, its frontiers are unlimited. But it must depend primarily on the realities of the
situation.”

19
[1991] 70 Comp. Cas. 127.
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LEGAL STANDARDS FOR PIERCING THE CORPORATE VEIL

Under statutory provisions:

 Non-compliance of requirements of incorporation (S. 464): The purpose of

the provision is to withdraw the advantages of incorporation when the
conditions of incorporation are not maintained.
 Misrepresentation in the Prospectus (Ss. 34, 35): In case of any kind of
misrepresentation in the prospectus, every director, promoter and every other
person who authorizes such issue of prospectus incurs liability towards those
who subscribed for shares on the faith of untrue statement. (Section 34).
 Failure to Return Application Money: If the company fails to receive
minimum subscription within 120 days after the date of issue of the
prospectus, it must refund the entire application money within next 10 days
(Section 39). In case of any default, the company and its officer who is in
default shall be liable to a penalty, for each default, of one thousand rupees for
each day during which such default continues or one lakh rupees, whichever is
less.
 Misdescription of Name: Where the name of the company is not mentioned
properly while transacting any kind of business in the name of the company,
the signatory directors are to be held liable. (Section 12).
 Fraudulent Conduct (Section 339): While winding up of the company, it
appears that any business of the company has been carried on with the intent
to defraud the creditors of the company or any other person, liability shall be
incurred if it is proved that the business of the company has been carried on
with the view to defraud the creditors.
 For Investigating the Actual Owner of the Company: Under section 216,
the Central Government may appoint one or more inspectors to investigate and
report on the membership of any company for the purpose of determining the
true persons doing the acts on behalf of the company.
 Sections 73 and 76: provide for prohibition on acceptance of deposits from
public and acceptance of deposits from public by certain companies. Every
officer of the company who is in default is to be made punishable with
imprisonment which may extend to seven years or with fine which shall not be
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less than twenty-five lakh rupees but which may extend to two crore rupees, or
with both. Company is liable to fine of not less than one crore rupees which
may extend to ten crore rupees.
 Liability for ultra vires act: The Object clause in the memorandum defines
the perimeters within which the company functions. Any act not authorized by
the object clause is ultra vires for which the members/ directors are liable.
Weeks v. Propert20 is an authority on point, where the loan in question being
ultra vires was held to be void and the warranty of the directors being broken,
they were held personally liable.

By judicial interpretation:

Protection of Revenue: In the case of Sir Dinshaw Maneckjee Petit, Re21, the assessee was a
millionaire earning huge income by way of dividend and interest. He informed four private
companies and transferred his investments to each of these companies in exchange of their
shares. The dividends and interest income received by the company was handed back to Sir
Dinshaw as a pretended loan. It was held that the company was informed by the assessee
purely and simply as a means of avoiding tax and company was nothing more than assessee
himself.

Fraud: in the case of Gilford motor company ltd v. Horne,22 Mr. Horne was an ex-employee
of The Gilford motor company and his employment contract provided that he could not
solicit the customers of the company. In order to defeat this he incorporated a limited
company in his wife's name and solicited the customers of the company. The company
brought an action against him. The Court of appeal was of the view that "the company was
formed as a device, a stratagem, in order to mask the effective carrying on of business of Mr.
Horne in this case it was clear that the main purpose of incorporating the new company was
to perpetrate fraud. Thus the court of appeal regarded it as a mere sham to cloak his
wrongdoings.

In another case, Jones v. Lipman,23 a man contracted to sell his land and thereafter changed
his mind in order to avoid an order of specific performance he transferred his property to a
company. Russel Judge specifically referred to the judgments in Gilford v. Horne and held
20
(1873) LR 8 CP 427.
21
AIR 1927 Bom. 371
22
[1933] 1 CH 935
23
[1962] 1 All ER 442
 11

that the company here was " a mask which (Mr.Lipman) holds before his face in an attempt
to avoid recognition by the eye of equity" he awarded specific performance both against
Mr.Lipman and the company.

Determination of the Enemy Character of a company: In the case of Diamler Company

Ltd v. Continental Tyre & Rubber Co.24, a company was incorporated in London by a German
company for the purpose of selling tyres manufactured in German. Its majority shareholders
were Germans. A war was declared between Germany and England and since the majority
shareholders were controlled by Germans, enemy company, the trade debt was dismissed on
the ground that such payment would amount to trading with the enemy company.

Where the Company is a Mere Sham or a Cloak: In the case of the Delhi Development
Authority v. Skipper Construction Company (P) Ltd.25, the Supreme court held that the fact
that the directors and members of his family had created several corporate bodies did not
prevent the court from treating all of them as one entity belonging to and controlled by the
director and his family if it was found that these corporate bodies were mere cloaks and that
the device of incorporation was really a ploy adopted for committing illegalities and/or to
defraud people.

In case of economic offences where certain degree of mens rea is required: In Santanu
Ray v. UOI26 Delhi High Court held that only after the veil of the corporate entity is lifted, the
adjudicating authorities will determine as to which of the directors is concerned with the
evasion of the excise duty by reason of fraud, collusion or wilful mis-statement or
suppression of facts, or contravention of the provisions of the Act and the Rules made there
under.

When purpose is to avoid welfare legislations: When the purpose of formation or existence
of an entity is to avoid welfare legislations, then the courts can lift the corporate veil, as was
held in the case of Workmen Employed in Associated Rubber Industry Ltd. v. Associated
Rubber Industry Ltd.27 In this case the holding company had been receiving dividends on the
share investments in the subsidiary company. When the said income was added in company's
income while calculating the workers' bonus under the Payment of Bonus Act, 1965, the
holding company formed a new, wholly-owned subsidiary of its own and transferred the
24
[1916] 2 AC 307.
25
[1996] 5 SCALE 202 (SC).
26
1989 65 CompCas 196 Delhi.
27
AIR 1986 SC 1.
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whole of this dividend income to the said newly formed subsidiary company. This latter
company had no other source of income of its own, except what it got by way of dividend
from the holding company. Thus, the profits available to workers for calculation of bonus got
reduced, thereby decreasing the amount of individual bonuses. J. Reddy, while lifting the
corporate veil said: "A new company is created, wholly owned by the principal company with
no assets of its own except those transferred to it by the principal company, with no business
or income of its own except receiving dividends from shares transferred to it by the principal
company and serving no purpose whatsoever except to reduce the gross profits of the
principal company. These facts speak for themselves."

Contempt of Court: In the case of Jyoti Ltd. v. Kanwaljit Kaur Bhasin28(sale of flats-
disputed-court restrained alienation) the Court has held that the corporate veil can be lifted to
punish for contempt of Court. Although such cases of contempt proceedings are very few and
those that do not squarely fall in the ambit, cannot be made an exception to the general rule of
'separate legal entity'. In the case of U.K. Mehra v. Union  of India,29 the Court had
specifically directed through an interim order to a certain company not to enter into any Joint
Venture in India and the company entered in India through its wholly-owned subsidiary, the
Court held that it could not be called as a contempt of court's order and the subsidiary would
not be called as a Joint Venture.

Mere Agency of the holding company: The landmark judgment about when can a
subsidiary be treated as an agent of the parent and, thus, held liable was delivered in the case
of Smith Stone & Knight Ltd. v Birmingham Corporation , a local company had a decree of
compulsorily acquiring a land owned by the appellants, SSK. The said appellants sold this
land to the BWC, its subsidiary company, and, thus, when the local company (the
respondents) wanted to acquire the said land, the appellants said they did not have the
ownership of the same. The Court realized that the said transaction was undertaken by the
agent of appellant for the benefits of its principal. The Court lifted the corporate veil and held
the parent company liable. The Court in this case laid 5 tests:

 That the profits of the subsidiary should be treated as that of holding

company;

28
1987 Del HC.
29
AIR 1994 Del 25.
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 The persons taking care of subsidiary's business should be appointed by

holding company;

 The holding-company should take care of the business of the subsidiary

and decide as to what should be done, how and when;

 The profits of the subsidiary should be as a result of skill and direction of

holding company;

 The holding company must have an effective and constant control.

In the case of Adams v. Cape Industries Plc30 it was held that the subsidiary was furthering
economic cause of holding company, the Court could not lift the veil. In the case of Royal
Industries Ltd. v. Kraft Foods, Inc, the Court said,

"Suing a parent corporation on an agency theory is quite different from attempting to

pierce the corporate veil. In the first instance, the claim against the parent is premised on
the view that the subsidiary had authority to act, and was, in fact, acting, on the parent's
behalf - that is, in the name of the parent."

Thus, while using this agency exception, the Courts have also been very cautious, as to
whether the said entity meets all the requirements to be called as an agency and, thus, if
satisfied, the corporate veil is lifted by the Court.

Acting against public policy: In the case of PNB Finance Ltd. v. Shital Prasad Jain31 the
Court extended the doctrine of 'lifting the corporate veil' to meet the ends of justice.
However, this criterion for lifting the corporate veil has always been in question due to its
vagueness. Moreover, the ambit of 'public policy' is so wide that it can cover too many things.
An exception to the general principle of 'separate legal entity' cannot go to an extent to
disregard the principle in its totality. Also, the ambit of an exception should be kept as small
as possible, so that a clear line can be drawn between the principle and the exception. In the
case of Re Polly Peck International Plc. (in administration)32 the Court said that when the
two claims are so closely connected, in respect of the same debt, then the Courts would look
into the legal substance of the said transaction rather than looking into the economic value of
the same. J. Robert Walker said that merely on the presence of the fact of perceived injustice,

30
[1990] Ch 433 
31
1983 Del HC
32
[1998] All ER (D) 194
 14

the Courts cannot disregard the principle of 'separate legal entity' and cannot lift the corporate
veil in the said transaction.

Negligent activities: In certain cases when the Court is satisfied that there was a presence of
duty of care on the part of holding company while the acts of its subsidiary are in question,
the former can be made liable for the acts of the latter, by lifting of the corporate veil, for
breach of duty of care, i.e., for the negligent act of the holding company e.g., in the case of
Chandler v. Cape Plc33, the English Court had held the parent company liable for negligent
act of its subsidiary with respect to the health and safety of the employees of the said
subsidiary. In this case the plaintiff was an employee of the subsidiary of the defendant.
While working with the said subsidiary company, the plaintiff, since he was exposed to
asbestos, acquired certain disease, about which he came to know later, when the symptoms
became visible. By that time, the subsidiary had already been shut down, so he brought a
claim of negligence against the said parent company. The Court of appeal, through L.J. Arden
said that there could be 4 situations where duty of care can be said to be present:


 When the business of both the parent and subsidiary are same, or almost
similar;

 When the parent company is supposed to have a superior knowledge of the
aspects related to health and safety related to the particular industry;

 When the parent company was supposed to know of the subsidiary's system
of work and that the said work was unsafe in nature;

 When the parent company could have reasonably foreseen that the
subsidiary company or its employees would rely on it, as the parent
company is supposed to have a superior knowledge of the nature of
activities conducted by the parent.34

LEGAL ISSUES SURROUNDING IMPOSITION OF CRIMINAL

LIABILITY ON CORPORATES

Relevant cases when the veil was pierced to impose criminal liability on corporate:

33
[2012] EWCA Civ 525
34
http://www.topcafirms.com/index.php/white-paper/7067 last accessed: 22/10/2015.
 15

Applying the principles mentioned above, courts in the past have pierced the corporate veil to
tax underlying assets of a company in cases of fraud, sham, tax avoidance, etc. The Vodafone
International Holdings v. Union of India,35 presented a case of misuse of the corporate
structure to evade taxes. The apex court in this case observed that – “Once the transaction is
shown to be fraudulent, sham, circuitous or a device designed to defeat the interests of the
shareholders, investors, parties to the contract and also for tax evasion, the Court can always
lift the corporate veil and examine the substance of the transaction.” 36 The Court, in this case,
accordingly held that the Income Tax Office was entitled to pierce the corporate veil in India
to see whether or not a company was a resident of Mauritius and if it was paying income tax
in Mauritius or not.37 Commissioner of Income Tax v. Sri Meenakshi Mills Ltd., Madurai, 38 is
another case in which the Court observed that the veil can be lifted to look into the economic
realities behind the legal facade. Similarly, in Life Insurance Corporation of India v. Escorts
Limited and Others,39 the Court pointed out four key instances when the veil can be pierced–
(a) where a statute itself contemplates lifting of the veil; (b) where there is a fraud or
improper conduct intended to be prevented; (c) where a taxing statute or a beneficial statute is
sought to be evaded, or (d) where associated companies are inextricably as to be, in reality
part of one concern.

The Court in one of the oldest cases, Shri Ambica Mills Ltd., Re,40 pointed out that in cases of
criminal acts of fraud by officers of a company, the court can pierce the veil to reach the
substance of the matter. Another important case which came up recently is VTB Capital v.
Nutritek41 in which dispute arose out of a fraudulently obtained loan. The Court of Appeal, in
this case made two important observations. First, it said - “lifting the corporate veil” does not
ignore the existence of the company, but allows the court to provide a remedy that would
otherwise be available only against the company (as opposed to the controller or vice versa).42
Secondly, it said that there is no requirement that the corporate veil can be lifted only when
there is no other remedy available.43 These two key points, when applied to a criminal case of

35
Vodafone International Holdings B.V. v. Union of India & Anr. [S.L.P. (C) No. 26529 of 2010, dated 20
January 2012].
36
Id, at para 75.
37
Id at para 94.
38
AIR 1967 SC 819.
39
(1986) 1 SCC 264.
40
0 1897 AC 22.
41
[2012] EWCA Civ 808.
42
Niranjan V., “VTB Capital: The Consequences of Lifting the Corporate Veil”, available at
<http://indiacorplaw.blogspot.in/2012/09/vtb-capital-consequences-of-lifting.html> last accessed: 18/10/2015.
43
Id.
 16

default by companies, means that imposing criminal liability can very well be a remedy even
when there are other remedies available. This is significant development because, it allows
piercing of corporate veil to impose criminal liability even when the matter can be disposed
by mere imposition of civil or administrative liability.

Criminal acts by subsidiary of a company:

Another most important legal issue related to fixing of criminal liability on corporations is
whether a parent company or its subsidiary should eventually be held liable for the wrongful
acts of the subsidiary. If it is said that the parent corporation cannot be held liable for criminal
acts of the subsidiary, this can further encourage corporate irresponsibility. Companies can
maintain strategic control from afar but strategically leave operations and safety mandates in
the hands of local managers and the host government. This way, control can be maintained,
while liability is evaded.44 As a general principle, a parent corporation is not liable for the
acts of its subsidiary. The report of the Committee45 on International Investment and
Multinational Enterprises (CIME) had pointed out that a liability on a parent company for
criminal acts done by a subsidiary was not recognized even in the member states of the
OECD.46 Also, “Corporate Veil” as a principle has so far, not been applied in situations of
extraordinary environmental hazard caused by subsidiary of a parent company. 47
Furthermore, the Indian Courts have also construed statute as "cracking open the corporate
shell" only when constrained to do so by the clear mandates of the statute. In fact, they have
taken extra precaution to avoid such construction wherever possible...48

However, U.S. Supreme Court in United States v. Bestfoods49 has pointed out that the Court
can pierce the corporate veil to hold the parent company liable for the conduct of its
subsidiary, if the corporate form is abused to achieve wrongful purposes, most notably, fraud

44
Cassels, Jamie, “The Uncertain Promise of Law: Lessons From Bhopal”, 29 OSGOODE HALL L. J. 1 1991
at p.20.
45
OECD had created this Committee for review and improvement of the OECD Guidelines.
46
Therefore, it is the widely accepted practice in the member states of the OECD “not to 'pierce the corporate
veil' unless special conditions justify such an extraordinary step; Responsibility of Parent Companies for their
Subsidiaries, OECD Publications, 1980; Cohn and Simitis, “Lifting the Veil in the Company Laws of the
European Continent”, 12 ICLQ 189 (1963) Page 7 of 11 of a parent company.
47
6 Kolvenbach Walter, “European Reflections on Bhopal and the Consequences for Transnational
Corporations”, 14 INT'L BUS. LAW. 357 1986.
48
Even looking from the American perspective the judiciary must have compelling reasons to ignore the limited
liability rule in order to impose liability on shareholders; Ramaiya, A., GUIDE TO THE CORPORATE ACT
(8th edn, 1977), at p. 108.
49
524 US 51 (1998) also available at <http://www.lawcornell.edu/supct/html/97-454.ZO.html> last accessed:
17/10/2015.
 17

on the shareholder’s behalf and the parent company is directly a participant in the wrong
complained of.

In India, the Bhopal Gas case is one of the most suitable examples where the question arose
as to whether parent company or the subsidiary is liable for the environmental hazard. The
two legal issues involved in the Bhopal case 50 were- whether there is a direct duty of a parent
corporation to manage its subsidiaries in a competent manner and, secondly, whether the
parent corporation can vicariously be held liable for the acts of its subsidiaries. The answer to
the legal issues involved here lies in the fact that 'persons harmed by criminal acts of a
multinationals corporation are not in a position to isolate which unit of the enterprise caused
the harm, yet it is evident that the multinational enterprise that caused the harm is liable for
such harm.' Holding the parent company liable is an effective measure to ensure full
compensation to the victims of the criminal wrong and to make such corporations
responsible. Justice Seth in the Bhopal case also pointed out that the veil can be pierced even
solely on the equitable considerations, when faced with situations of mass disaster and assets
of the subsidiary being grossly deficient to satisfy the just claims of the victims. He further
observed that the principle that a company has a legal and separate identity of its own is not
an absolute principle and has much been watered down with the increasing number of
exceptions since Salomon v. Salomon...51

CONCLUSION

After going through all the decisions on point, it can be seen that courts have exercised very
wide discretion to decide whether or not to pierce the veil in a particular case to impose

50
Union of India v. Union Carbide Corp. Ltd (M.P.H.C.).
51
[1897] AC 22; Supra Note 3 at para. 14.02.02.
 18

liability upon the members. Being mindful of the fact that the primary goal of corporate law
ought to be certainty and predictability, this has led to uncertainty and lack of predictability
regarding legal standards for lifting of the veil. The judges can choose any theory of their
choice or sometimes even invent a theory of their own to fasten the liability on equitable
grounds.

Though, it is now very clear that incorporation does not cut off personal liability at all times
and in all circumstances.52 “Honest enterprise, by means of companies is allowed; but the
public are protected against kitting and humbuggery.”53Therefore, the sanctity of a separate
corporate identity is upheld only insofar as the entity is consonant with the underlying
policies which give it life. The Courts have at times seized upon certain facts as evidence to
justify the imposition of liability upon the share holders.54

Therefore, it is observed that although courts have time and again made references to the
different legal principles, they have often used them without much clarity or decisiveness and
there exists a wide discretion with the courts whether to lift the corporate veil in a particular
case or not.

BIBLIOGRAPHY

BOOKS AND ARTICLES:

52
Clive M. Schmitthoff, “Salomon in the Shadow”, 1976 JBL 305.
53
Cadman, “The Corporation in New Jersey”, (1949) 353.
54
Cohen & Simitis, “Lifting the Veil”, (1963) 12 IC LQ 189.
 19

 Avtar Singh, “Company Law”, Eastern Book Company, 16th edn., 2015.
 G. K. Kapoor, Sanjay Dhamija, “Company Law”, Taxmann Publications Private
Limited, 17th edn., 2013
 Dr. N.V. Paranjape, Company Law, Central Law Agency 3rdedn., 2005.
 Majumdar A.K., Company Law, Taxmann Publications Private Limited, 16thedn.,
2013.

 Clive M. Schmitthoff, “Salomon in the Shadow”, 1976 JBL 305.

 Cadman, “The Corporation in New Jersey”, (1949) 353.
 Cohen & Simitis, “Lifting the Veil”, (1963) 12 IC LQ 189.

WEBSITES:

 http://indiacorplaw.blogspot.in/2014/09/the-indian-supreme-court-on-lifting.htm
 http://artismc.com/index.php/blogs/view/55/221/
 http://www.lawctopus.com/academike/corporate-veil/
 http://www.topcafirms.com/index.php/white-paper/7067