CORPORATE VEIL

&

GOVERNANCE

PARDE MEIN REHNE DO PARDA NA UTHAO

The famous song from the movie, Shikar is the refrain of the
promoters, whereas the common investing public would much rather
sing “Parda Uthe Salaam Ho Jaaye” The courts have had to strike a
fine balance between the two.

Piercing of Corporate Veil under Statutory Provisions enshrined

under the Companies Act, 2013
The Veil of a company may be lifted in certain cases or pierced as per express
provisions of the Act. In other words, the advantages of ‘distinct entity’ and
‘limited liability’ may not be allowed to be enjoyed in certain circumstances.
The Companies Act, 2013 itself provides for certain cases in which the
directors or members of the company may be held personally liable. In
such cases, while the separate entity of the company is maintained, the
directors or members are held personally liable along with the company.

HISTORICAL PERSPECTIVE
The House of Lords in Salomon v Salomon1 affirmed the legal principle that,
upon incorporation, a company is generally considered to be a new legal
entity separate from its shareholders. The court did this in relation to what was
essentially a one person company. Windeyer J, in the High Court in Peate v
Federal Commissioner of Taxation, stated that a company represents:
“new legal entity, a person in the eye of the law. Perhaps it were better in some
cases to say a legal persona, for the Latin word in one of its senses means a
mask: Eriptur persona, manet res.”
Salomon v Salomon & Co [1897] AC 22

“Between the investor, who participates as a shareholder, and the

undertaking carried on, the law interposes 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 either case the business or the capital of the shareholders.
Assuming, of course, that the company is duly formed and is not a
sham...the idea that it is mere machinery for effecting the purposes of
the shareholders is a layman’s fallacy. It is a figure of speech, which
cannot alter the legal aspect of the facts.”
Lord Sumner in Gas Lighting Improvement Co Ltd v Inland
Revenue Commissioners (1923) AC 723
 The separate legal entity principle has continued unexpurgated corporate law
for more than one hundred years. When a company acts it does so in its own
right and not just as an alias for its controllers. Similarly, shareholders are not
liable for the company’s debts beyond their initial capital investment, and have
no proprietary interest in the property of the company.

At the same time, courts have acknowledged that the corporate veil of a
company may be pierced to deny shareholders the protection that limited liability
normally provides. “Piercing the corporate veil” refers to the judicially imposed
exception to the separate legal entity principle, whereby courts disregard the
separateness of the corporation and hold a shareholder responsible for the actions
of the corporation as if it were the actions of the shareholder. A court may also pierce
the corporate veil where requested to do so by the company itself or shareholders in
the company, in order to afford a remedy that would otherwise be denied, create an
enforceable right, or lessen a penalty.

The object of incorporation as a distinct legal entity is to promote the widest

possible public participation in joint undertakings, with liability limited to the
investment in the undertaking. But, like all good things, the corporate personality has
also, unfortunately, lent itself to abuse in some cases, e.g., outwitting the Revenue or
defrauding creditors. There may also be unintended hardship where a fetish is made
of the legal form and an undertaking is denied the relief that is reasonably due to it.
Courts have not hesitated to look at the reality beyond the apparent, wherever
substantial justice has required it. While the Courts have been increasingly liberal,
the treatment of the concept of incorporation by the Legislature has also been getting
too casual for comfort, in recent years.

When courts pierce the corporate veil, they can remove the protection of
limited liability otherwise granted to shareholders. It is therefore relevant to
review the reasons why companies are granted limited liability.

Three reasons, based upon principles of economic efficiency, can be

provided for why companies are granted limited liability. First, limited liability
decreases the need for shareholders to monitor the managers of companies
in which they invest because the financial consequences of company failure
are limited. Shareholders may have neither the incentive (particularly if they
have only a small shareholding) nor the expertise to monitor the actions of
managers. The potential costs of operating companies are reduced because
limited liability makes shareholder diversification and passivity a more rational
strategy.
Secondly, limited liability provides incentives for managers to act efficiently
and in the interests of shareholders by promoting the free transfer of shares.
This argument has two parts to it. First, the free transfer of shares is promoted
by limited liability because under this principle the wealth of other
shareholders is irrelevant. If a principle of unlimited liability applied, the value
of shares would be determined partly by the wealth of shareholders. In other
words, the price at which an individual shareholder might purchase a share
would be determined in part by the wealth of that shareholder which was now
 at risk because of unlimited liability. The second part of the argument (that
limited liability provides managers with incentives to act efficiently and in the
interests of shareholders) is derived from the fact that if a company is being
managed inefficiently, shareholders can be expected to be selling their shares
at a discount to the price which would exist if the company were being
managed efficiently. This creates the possibility of a takeover of the company
and the replacement of the incumbent management.

Thirdly, limited liability assists the efficient operation of the securities markets
because the prices at which shares trade does not depend upon an
evaluation of the wealth of individual shareholders.

The paper of which above is the first part draws upon legal expertise of a

number of authorities all of whom cannot be individually acknowledged. To

repeat Aristotle: “ART IS IMITATION”

 Fourthly, limited liability permits efficient diversification by shareholders,
which in turn allows shareholders to reduce their individual risk. If a principle
of unlimited liability applied and the shareholder could lose his or her entire
wealth by reason of the failure of one company, shareholders would have an
incentive to minimise the number of shares held in different companies and
insist on a higher return from their investment because of the higher risk they
face. Consequently, limited liability not only allows diversification but permits
companies to raise capital at lower costs because of the reduced risk faced by
shareholders.

Fifthly, limited liability facilitates optimal investment decisions by managers. As we

have seen, limited liability provides incentives for shareholders to hold diversified
portfolios. Under such circumstances, managers should invest in projects with
positive net present values, and can do so without exposing each shareholder to the
loss of his or her personal wealth. However, if a principle of unlimited liability
applies, managers may reject some investments with positive present values on the
basis that the risk to shareholders is thereby reduced. “By definition this would be a
social loss, because projects with a positive net present value are beneficial uses of
3
capital”.

1. Ambit

One of the most interesting, but, at the same time, most difficult, questions in
company law relates to the doctrine of lifting the corporate veil. This is one of
those doctrines which is easily understood in its broad outline, but is not so
easily applied when a concrete case presents itself.

The reasons for this situation are many. In the first place, by partially
disregarding the corporate personality of an entity, the court, in fact, takes a
step which is not in literal conformity with the theory of incorporation, given
effect to by a statutory provision. Obviously, the court here assumes a
jurisdiction which has to be exercised with caution. Secondly, the
circumstances in which the veil of a corporation may be lifted and an act,
nominally done by the corporation, may, by judicial construction, be attributed
to some other person or entity, are indefinite and theoretically infinite. That
must be so, because the power is asserted and exercised on grounds which
are outside the statute law relating to companies and are based on principles
which are uncodified. Those circumstances have no other definition,
excepting that they are linked by one common thread of protecting the public
interest. Thirdly, because of the elusive and uncodified character of those
circumstances, differences of opinion are bound to arise between the trial
judge and the appellate court, so that legal advisers of corporations can never
predict with certainty what view the court will take about a particular
transaction, when it is argued that someone other than the company should
be held liable. In a sense, the jurisdiction to lift the corporate veil which the
courts have commenced exercising is analogous to the jurisdiction which the
courts in equity started exercising, in order to remove or reduce injustice or
hardship in specific situations that arose from strict application of common law
rules. The master principle was justice and equity, but the situations amenable
to that principle could never be codified.

1.1 This very elusive quality of the doctrine of lifting the veil has encouraged
academic thinking and discussion on the subject It is common experience that
where the sources of legal doctrine in a particular sphere are not the bare
bones of a statute, but the flexible tissues of case law, academicians feel
tempted to offer not only an analysis of what has gone into the law by past
rulings, but also an anticipation of what is likely to enter the field of law by
future judicial pronouncements.

2. Legal fictions

Incidentally, it may also be mentioned that juristically the subject has another
interesting aspect also. The creation of an artificial legal person by a provision
of the nature usually found in company legislation is essentially the
introduction of a legal fiction. Statutory incorporation of a company as an
entity distinct from its members is virtually the conferment of legal personality
on an association which has no legal life. This legal fiction, having its genesis
in statute, must, of course, be allowed to operate. However, in some
circumstances, the fiction may have to be disregarded or, if one may put it that
way, it has to be offset and counteracted in the interests of justice. What the
court, in effect, does when it lifts the corporate veil is this. The court,
performing its role of statutory construction, limits the statutory fiction to
certain circumstances and excludes other circumstances from its scope. In
other words, the court construes in a limited manner the statutory language
creating the fiction of incorporation.

3. Statutory construction

This is not a process peculiar to the sphere of company law. Students of

statutory interpretation are aware of the problem of how much amplitude
should be attributed to a particular statutory fiction. Two general principles,
apparently in conflict with each other, seem to be operative. These are as
under:

3.1 In interpreting a statutory provision creating a legal fiction, once the

purpose of the fiction is ascertained, the court must give it its logical scope.
After ascertaining the purpose, full effect must be given to the statutory fiction
and it should be carried to its logical conclusion - State of Bombay v.
Pandurang Vinayak AIR 1953 SC 244. To that end, it will be proper and even
necessary to assume all those facts on which alone the fiction can operate -
CIT v. Sardar Teja Singh ATR 1959 SC 352. In a passage which is very often
quoted, Lord Asquith stated : "If you are bidden to treat an imaginary state of
affairs as real, you must surely, unless prohibited from doing so, also imagine
as real the consequences and incidents which, if the putative state of affairs
had in fact existed, must inevitably flowed from or accompanied it. The statute
says that you must imagine a certain state of affairs ; it does not say that
having done so, you must cause or permit your imagination to boggle when it
comes to the inevitable corollaries of the state of affairs." - East & Dwelling
Co. Ltd. v. Finsbury Borough Council [1951]2 All ER 587 (HL).

To quote a proposition laid down in the context of sections 42 and 43 of the

Indian Income-tax Act, 1922 (deeming the agents of non-residents to be the
assessees), "now, when a person is deemed to be something, the only
meaning possible is that whereas he is not in reality that something, the Act of
Parliament requires him to be treated, as if he were" (p.56) - CIT v. Bombay
Corpn. AIR 1930 PC 54.

3.2 But there is a counter principle, which tells us that a fiction should not be
extended beyond the purpose for which it is created. The court is entitled to
ascertain for what purposes and between what persons the statutory fiction is
to be resorted to. This comment of Lord Justice James in Ex parte Walton
[1881]17Ch.D746 has been cited in Indian cases also e.g., State of
Travancore- Cochin v. Shanmugham Vilas Cashewnut Factory AIR 1953 SC
333. It is by virtue of this counter principle, it seems that courts exercise
jurisdiction to lift the corporate veil.

4. Lifting the corporate veil - Variety of circumstances

Theoretically, the circumstances in which the veil may be lifted cannot be

defined. Nor can one say that the veil will be lifted only on this or that
principle, excepting that there is the paramount consideration of public
interest. The manner in which the veil has been lifted also cannot be limited.
For example, by lifting the veil, courts have held another company as the real
occupier of certain premises which apparently stand in the name of its
subsidiary - Smith Stone & Knight v. Bermingham Corpn. [1939] 4 All ER 116
(KB). Again, where an individual controlled a number of companies as if they
were his personal property, the court treated those companies as his
creatures for which he was responsible - Wallersteiner v. Moir (No. 1) [1974] 3
All ER 217 (CA). Further, if a company is controlled by enemy subjects, then,
even though it may be incorporated in Great Britain, it may be held to be an
'enemy' within the meaning of legislation relating to trading with the enemy -
Daimler Co. Ltd. v. Continental Tyre & Rubber Co. (Great Britain) Ltd. [1916] 2
AC 307 (HL); Clark v. Uebersee Finance Corpn. AG [1947] 332 US 480.
Similarly, directors acting as the agents of the company have been held to be
liable on a contract when they intentionally rendered fulfilment of the contract
impossible - Torquay Hotel Co. v. Cousins [1969] 2 Ch. 106. Further, an
opinion has been expressed that though a company does not become an
agent of a shareholder merely by virtue of the shareholders controlling all or
most of the capital, yet, if there is functional control by the shareholder, it may
become a question of fact whether the shareholder really controls the
company which is its de facto agent. According to Sir Otto Kahn-Freund in
[1940] 3 Modern Law Review 226, 227, the company can be regarded as the
agent of the shareholder, if the shareholder —

a. treats, as his own, the profits of the company;

b. appoints the persons conducting the business;
c. is the 'head and brain' of the trading venture;
d. decides what capital should be embarked on the venture;
e. makes the profits by his skill and direction ; and
f. is in effectual and constant control.

5. Need for defining the concept

It is surprising that while so much literature has gathered round the concept of
lifting the corporate veil, the discussion usually does not attempt a definition of
the concept. Enumeration of specific instances may be helpful, and so would
be a delineation of the main objectives of this judicial device. But the
discussion could be rudderless without a definition. It was Aristotle who
pointed out that defining a basic concept could be the first step towards
acquiring knowledge about it. It is believed that when one talks of lifting the
corporate veil, one has in mind a process whereby the corporate status of an
entity is disregarded and the incorporation conferred by statute is overridden
in search of reality, thereby attributing to someone other than the corporate
entity an act of the entity. In other words, the fiction created by statute is
displaced or effaced, and in its place, the reality is substituted. The
transference of the act of the entity to someone else may take various forms.
That someone else may be a shareholder, a director or another corporation,
as is illustrated by some instances mentioned above. The objectives sought to
be achieved by such transference are also various. The object may be to
benefit the revenue by checking evasion, or to prevent violation of some
statutory restriction by de-recognising circumventing devices. But the thread
that connects all these diverse instances must be sought in some basic
concepts, which (as suggested above) is the legal transference of an act of a
corporate entity to some other individual or entity, thus restoring reality in
place of a legal fiction. Of course, this is not to say that the process should be
readily resorted to.

5.1 "Lifting the veil" is itself an interference with a state of affairs brought into
being - albeit artificially - by law. The 'veil' is there because it was brought into
existence by a legal provision. To override a legal doctrine by substituting
something in its place is a piece of activism. And activism, whether of the
judiciary or of any other institution, has its limits, its pitfalls, its grey areas, its
twilight zones. This is the reason why courts have often been warned against
adopting the device of lifting the corporate veil too readily. There must be a
counter-balancing consideration, weighty enough to justify effacement of a
legal concept. There is no more lucid or terse statement of the gist of the
concept than that to be found in an American case - United States v.
Milwankee Refrigerator Transit Co. [1906] 142 F. 247 - "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".

6. Rationale

The rationale underlying a judicial decision to lift the veil has been linked up
sometimes with the need to check fraud. Two academic writers have put it on
a more elastic plane. "English legal thinking... shows no inhibition to piercing
the veil where it is intended to use the veil for the protection of interests which
are unworthy of such protection" - E.J. Cohn & C. Simitis [1963] 12 ICLQ 189.
This leaves a more elastic scope for judicial creativity, because the test is
expressed in terms of a veil which protects "interests unworthy of protection",
without enumerating the interests as such. Illustrative of this is the English
case of Gilford Motors Co. Ltd. v. Home [1933] Ch. 935 (CA). In that case, the
court held that a former director of the plaintiff company who had bound
himself by a restraint of trade clause could not escape its operation by hiding
behind a company formed as "a mere cloak or sham for the purpose of
enabling him to commit a breach of his covenant...." An injunction was
accordingly granted against the defendant personally as well as against the
company formed by him. Of course, every case of lifting the veil is not
necessarily a case of fraud, illegal object or conspiratorial and behind the
curtain activities. The doctrine may be applied even where these elements are
totally absent, or if present, are present in a minor degree. Thus, in Torquay
Hotel Co. (supra), the directors of a company were held personally liable for
intentionally rendering the fulfilment of a contract by the company impossible.
The defendants sought to escape liability by pleading that they acted merely
as agents, but the court considered itself free to look behind the corporate veil
and act on the realities of the situation.

6.1 In fact, the doctrine of lifting the veil may be resorted to in a situation
where there is no question of fraud or evasion of law. In State of U.P. v.
Renusagar Power Co. [1988] 1 CLA 1 (SC) (reported in section III of this
issue), the doctrine was applied to support claim of Renusagar for exemption
or liberal treatment in respect of electricity duty, the Court holding that electric
power generated by a company and utilised by another company was to be
regarded as power used by the latter company from "its own source" within
the meaning of section 3(1) (a) of the U.P. Electricity Duty Act, 1952. There
were several reasons for so lifting the veil between a holding company and its
subsidiary - the two companies involved in the instant case were so
connected. The most important was the consideration that all concerned,
including Government, the concerned local authority, etc., had treated the two
as, in reality, one. There was no question, in the above case, of one company
having adopted a subterfuge to form a subsidiary company or to utilise power
generated by it. The arrangement had been openly entered into and accepted
by the public authorities. It was to buttress this past treatment that the Court
resorted to (what it described as) the device of lifting the corporate veil. The
Court held that even though the two companies were two separate legal
entities, the circumstances and the background showed that the 'duality' had
been disregarded and the two had been treated as one, so far as the
generation of power by one company and its consumption by another
company was concerned. Strictly speaking, this was not a case of lifting the
corporate veil. The corporate status of each company, vis-avis its
shareholders, agents and directors, remained intact. What the Court did, in
effect, was to disregard the dividing wall between two corporate entities. The
case presents certain peculiar features. In the first place, there was no
question of evasion of tax, and the device of disregarding the wall between
two companies was adopted by the Court for assisting the company as an
assessee. Secondly, the ruling of the Court helped the assessee and not the
Government. Thirdly, there was no element of trick, fraud or subterfuge.
Everything was done openly and with the encouragement and approval of
public authorities. No doubt, a legal wall separating two companies was
regarded as irrelevant, because the circumstances showed that the two were
acting in unison. It was a case of unifying two diverse corporations, rather
than merely lifting a corporate veil. Of course, the ruling was similar to the
traditional cases of lifting the corporate veil, inasmuch as (i) the court gave
effect to the reality of unity, rather than to the theoretical diversity, and (if) the
decision related to the corporate sphere, involving, as it did, two entities
separately incorporated.

7 . Doctrine in England and the Common wealth

The doctrine of lifting the corporate veil has been applied in almost all
countries of the Commonwealth, as also in the United States and on the
Continent. It seems to have originated in England. Some writers trace its
origin to two cases decided in the 17th century - Edmunds v. Brown & Tillard
[1668] 83 ER 385 and Hamborough Co. [1671] 1 Ch. App. 204. In the present
century, the doctrine became necessary for counter-acting the proposition laid
down in Salomon v. A. Salomon & Co. Ltd. [1897] AC 22 that a company even
if it be a 'one man company' - is a person different in law from the controlling
shareholder. In exceptional cases, the veil of the corporateness had to be
lifted and the separate personality of the company had to be disregarded.
That is how the doctrine came to be operative. Of course, as has been
indicated above, the present scope of the doctrine, as elaborated in the
cases, is much wider. Broadly speaking, in England, the important cases in
which this exceptional approach has been adopted are as under :

 In some cases, the Legislature has lifted the veil, e.g. , in requiring,
holding and subsidiary companies, to prepare group accounts - Smith,
Stone & Knight Ltd. (supra) and Charles worth, Mercantile Law [1984]
ELBS Reprint 1985, p. 70.
  If the controlling shareholder uses the company as his agent, the
doctrine is applied - Wallersteiner (supra) and Charles worth,
Mercantile Law (supra).
 If the corporate form is abused for an unlawful or immoral purpose, the
doctrine is applied - Gilford Motors Co. Ltd. (supra) and Charles worth,
Mercantile Law (supra).
 If lifting the veil is necessary to give effect to legislation (such as enemy
trading legislation) and is justified on the basis of control exercised by
some entity over a company, the doctrine is applied Daimler Co. Ltd.
(supra).

7.1 The doctrine as evolved in England has travelled overseas and has come
to be applied in many Commonwealth countries (apart from India). For
example, the Canadian case - Fern Brand Waxes Ltd. v. Pearl. [1972] 3 OR
839 (CA.) - holds that the separate identity of a company is not to be used as
an instrument to perpetrate fraud, see Mervyn Woods, "Lifting the Corporate
Veil in Canada" [1957] 37 Can. B. Rev. 1176. There are also precedents from
New Zealand and Australia recognising this doctrine, see Kaiser Aluminium &
Chemical Corporation v. Reynolds Metal Co. [1969] 43 ALJR 156 JR
Mackenzie Ltd. v. Gianoutos & Booleris [1957] NZLR 309 and Re Securiti
bank Ltd. (No. 2). [1978] 2 NZLR 136.

8. United States and Europe

The most interesting development is the fact that some of the English cases
have been directly followed in the United States. Thus, the decision of the
House of Lords in Daimler Co. Ltd. (supra) regarding enemy character of a
corporation was followed in the United States in Clark (supra). Most cases in
America involve situations involving fraud or illegality. The courts disregard the
corporate facade whenever it is being abused for puposes of fraud or illegality.
As Sanborn, J. put it in Milwankee Refrigerator Transit Co. (supra): "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". However, the corporate veil cannot be removed
merely to give the other litigant an advantage at law - Wooddale Inc. v.
Fidelity, etc. Co., 378 F. 2d 627 [1967]. It appears that the doctrine of lifting
the veil has come to be recognised on the Continent also E.J. Cohn and C.
Smitis (supra), Lifting the Veil in the Company Laws of the European
Continent [1963] 12 ICLO 189; Lifting the Veil in the EEC [1974] Vol. 2, Law
and Policy in International Business 375.

9. Branches of law involved

Subject wise also, the doctrine of lifting the veil has ranged over an extensive
field, competing with its wide geographical coverage. Thus - to cite only a few
important instances without intending to be exhaustive - the doctrine of lifting
the veil has been applied in the following branches of law :
  Acquisition of land or premises - DHN Food Distributors Ltd. v. London
Borough of Tower Hamlets [1976] 3 All ER 462 ; Smith, Stone & Knight
Ltd. v. Birmingham Corpn. (supra)
 Alien enemies - Daimler Co. Ltd. (supra)
 Contractual stipulation restraining trade - Gilford Motor Co.(supra)
 Contract in general and its enforceability Torquay Hotel Co. (supra). In
this case directors were personally held liable for intentionally
rendering the fulfilment of a contract by the company impossible -
Jones v. Lipman [1962] 1 WLR 832 is also of interest Mr. Lipman
agreed to sell some property to Mr. & Mrs. Jones. Mr. Lipman did not
want to perform the contract and sold and transferred the property to a
private company that was wholly owned and controlled by him. The
purpose of the transaction was to defeat the purchasers' claim for
specific performance. It was held that the private company was a sham
to avoid enforcement of the equitable remedy of specific performance
and an order for specific performance was granted against Mr. Lipman
and the private company.
 Criminal law, see, infra D Taxation CIT v. Sri Meenakshi Mills, AIR 1967
SC 819
 Trusts - Abbey Malvern Wells Ltd. v. Minister of Local Government &
Planning [1951] Ch. 728.

10. Constitutional law

The doctrine of lifting the corporate veil was unsuccessfully put forth for
securing for companies a fundamental right in Tata Engineering & Locomotive
Co. Ltd. v. State of Bihar [1964] 34 Comp. Cas. 458 (SC). Article 19 of the
Indian Constitution guarantees the six freedoms to "citizens". Since a
company cannot be a citizen, the company in the above case wanted to lift
the corporate veil so as to sustain the maintainability of the petition filed by the
company under article 32 of the Constitution by treating it as one filed by the
shareholders of the company. The request of the company was turned down
by the Supreme Court on the ground that it was not possible to treat the
company as a citizen for the purposes of article 19 of the Constitution. This
decision may be correct on the language of the constitutional provisions. But it
raises an important question for the future. If a corporation can never claim
the freedoms guaranteed by the Constitution because it is not a citizen, then it
cannot claim the freedom of speech and expression guaranteed by article 19
(1) (a) of the Constitution. This would lead to the position that corporations
owning newspapers or periodicals, publishing houses, film producing
concerns and the like have no constitutional protection against interference
with their literary, artistic and other creative activities when they bring out
publications or films. Their right to collect, receive and disseminate
information would similarly remain unprotected by the constitutional guarantee
and would have to come down to the lower level of an ordinary right, not
secure against the onslaughts of political interference, social prejudice or
individual animosity. The position is anomalous; and it may be mentioned that
the Law Commission of India some time ago recommended an amendment of
article 19 to widen its scope to cover corporations registered under Indian law,
barring those which are subject to substantial foreign control.
11. Criminal law

Criminal law presents a peculiar situation. Generally, courts are reluctant to

shift criminal liability for an act done by A to the shoulders of B, unless there is
evidence of some contribution by B towards the act of A. This is because of
the doctrine that criminal liability is always personal and requires a guilty
mind. It has an essential link with the rationale of punishment. To punish B for
an act done by A is meaningless because, if B does not have a guilty mind,
then punishing him achieves neither deterrence, nor reformation ; and, even
as retribution, it is irrational. Besides this, it shocks our sense of justice.

11.1 This conventional theory has come to be modified in modern times; but
the modification has been effected by a specific statutory provision, rather
than by judicial application of the doctrine of lifting the corporate veil or any
other juristic doctrine. The creation of a host of 'statutory' offences, known as
public welfare offences, or regulatory crimes, or by other suitable appellation,
facilitated this process. The orthodox concept of a 'crime' involving moral
turpitude gave way to another concept of criminal liability through special
statutes passed to deal with social and economic matters. A juristion
exposition of the status of such offences will be found in two comprehensive
reports of the Law Commission - 29th and 47th. Both deal with social and
economic offences. The point to note is that the creation of regulatory crimes
by statute has been accompanied by a relaxation of the doctrine of mens rea
(the mental element in crime) and this relaxation itself has been accompanied
by provisions showing a readiness to impose vicarious liability, even in
criminal law. It was in some such climate that the practice started of inserting
in modern legislation a provision to the effect that when an offence is
committed by a company, then its directors, managers and other officers are
also criminally liable unless they can prove that they had no complicity in the
crime and could not have prevented the commission of the offence with
reasonable diligence. This is the gist of such provisions, though the actual
language employed is much more complex.

11.2 In India, provisions of this nature started in 1948, and are now a common
feature of most Central Acts imposing penal liability for violations of statutes.
From the point of view of criminal law and jurisprudence, the subject deserves
separate treatment in itself. But its importance in corporate law lies in the fact
that a statutory provision imposes criminal liability even if it be by a rebuttable
presumption - where none would have existed by general principles at
common law. The company, of course, continues to remain liable; but, in
addition, its directors and managers are made liable. Such artificial extension
of criminal liability may, in a sense, be regarded as lifting the corporate veil or
"shifting" it. But it must be remembered that there are several special features
present here. In the first place, such creation of additional liability is always by
statute, and not by judicial exposition. Secondly, the device has been adopted
on pragmatic considerations as a measure of law enforcement, rather than on
a theoretical consideration of pros and cons. Thirdly, since liability is imposed
by a statutory provision, there is not much scope for a case by case
consideration and weighing of pros and cons in each individual situation,
which one comes across in cases where arguments for lifting the corporate
veil are addressed to the court in matters involving civil consequences.

12. Limitations - A case from banking law

The corporate veil is not to be easily lifted. And in the absence of special
circumstances, courts hesitate to do so, because every attempt to lift the veil
is an inroad on the corporate personality of the company which was brought
into existence by specific statute. The corporation is not, as a rule, to be
confused with its director, its manager, its shareholder, or its holding or
subsidiary company, unless such a course is justified either by statute or by
well established principles as to lifting the corporate veil. Thus, in banking
practice, it is very risky to confuse a corporation and its director, and any
transaction by the bank in which the separate legal identity of a company and
its director is overlooked is bound to run into trouble.

Neither the directors nor the secretary should be allowed to put cheques
payable to the company into their private accounts- Sheldon & Fidler, Practice
and Law of Banking 1982 ELBS Reprint 1986, p. 117. The danger of allowing
a director or other agent to place cheques payable to the company or to his
principal to the credit of his own account was emphasised in the case of
Underwood v. Bank of Liverpool. [1924] All ER 230. Underwood converted his
business into a private limited company in which he held all the shares except
one. By the articles, he was appointed sole director. A debenture was issued
creating a floating charge over all the assets of the company to secure its
banking account. Soon after the formation of the company, Underwood
commenced to pay into his own private account cheques in favour of the
company duly endorsed by himself as sole director. In an action brought by
the receiver for the debenture holders, it was held that Underwood's bankers
had been guilty of negligence, and they had to refund all amounts so
received. Although Underwood was for practical purposes the sole proprietor
of the company, his action was undoubtedly a fraud on the company's
creditors, since even in the case of a 'one-man' company, the company is an
entity of itself, quite apart from that of its chief proprietor. The collecting
banker was, therefore, guilty of negligence. A banker should not allow any
director, or other agent, or a partner, to put to his own account cheques drawn
payable to the company, his principal or his firm.

13. Statutory provisions

It is sometimes stated that several provisions in the Income- tax Act, 1961
furnish illustrations of lifting the corporate veil. The sections of the Income-tax
Act usually mentioned in this behalf are sections 178 (4), 179(1), 278B(1) and
278B(2). But, strictly speaking, many of these provisions are provisions
focusing on adequate law enforcement, rather than on any point of corporate
law. Section 179 (1) of the Income-tax Act is the only provision which has
something to do with the concept of lifting the corporate veil. It provides for
personal liability of directors of a private company for the taxes due from a
private company and becoming irrecoverable from the company, in respect of
the income of the private company for any period during which it was a private
company, unless the person who was a director during that period proves that
the irrecoverability cannot be attributed to any gross neglect, misfeasance or
breach of duty on his part in relation to the affairs of the company. This is a
negative provision throwing the onus on the director to prove his non-
culpability.

The Companies Act, 1956 itself imposes personal liability in certain cases. For
example, where business is carried on beyond six months after knowledge
that the membership of the company has gone below the statutory minimum
[section 45], or a contract is made by misdescribing the name of the company
[section 147], or the business is carried on only to defraud creditors [section
542], members or officers who are parties to such transactions are personally
liable -William C. Leitch Bros. [1932] 2 Ch. 71 and Nagendra Prabhu v.
Popular Bank AIR 1970 Ker. 120.

14. Some illustrative cases

It may be convenient to refer to a few other decided cases by way of

illustration.

 In Littlewoods Mail Order Stores Ltd. v. IRC [1969] 3 All ER 855 (CA),
Lord Denning said: "The doctrine laid down in Salomon v. Salomon
(supra) has to be watched very carefully. It has often been supposed to
cast a veil over the personality of a limited company through which the
courts cannot see. But that is not true. The courts can and often do
draw aside the veil. They 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 should follow suit. I
think that we should look at the Fork company and see it as it really is -
the wholly-owned subsidiary of the taxpayers. It is the creature, the
puppet of the taxpayers in point of fact, and it should be so regarded in
point of law."(p. 860) In the above case, the taxpayers carried on a big
business at premises in Oxford Street, London which in 1956 were
worth £2,000,000 if sold with vacant possession and £60,000 a year
rent on a yearly tenancy, but which they held on a 99 years lease.
Under an arrangement made in 1958, a wholly owned subsidiary of the
taxpayers became freeholders of the premises. The former freeholders
became the subsidiary's lessees under a lease of 22 years at a rent of
£ 6 a year, and the taxpayers became sub-lessees of the former
freeholders. It was held that the deduction of rent in computing the
taxpayers' profits for tax purposes was properly limited to £23,444, i.e.,
excluding the increase in the rent of £ 19,006 as being a sum paid for
the acquisition of a capital asset (the freehold), through their wholly
owned subsidiary.
 In Wallersteiner v. Moir (No. 1) [1974] 3 ALL ER 217 (CA), there was
purchase of shares with financial assistance of the company. The
director was responsible for procuring loan but loan was used in
connection with purchase of the company's shares. Part only of the
loan was recovered by the company. Liability of the director to the
company for loss was held to arise. Lord Denning, M.R.'s dicta in this
 case are lucid : "I am prepared to accept that the English concerns -
those governed by English company law or its counterparts in Nassau
or Nigeria - were distinct legal entities. I am not so sure about the
Liechtenstein concerns - such as the Rothschild trust, the Cellpa trust
or Stawa A.G. There was no evidence before us of Liechtenstein law. I
will assume, to, that they were distinct legal entities, similar to an-
English limited company. Even so, I am quite clear that they were just
the puppets of Dr. Wallersteiner. He controlled their every movement.
Each danced to his bidding. He pulled the strings. No one else got
within reach of them. Transformed into legal language, they were his
agents to do as he commanded. He was the principal behind them. I
am of the opinion that the court should pull aside the corporate veil and
treat these concerns as being his creatures, for whose doings he
should be, and is, responsible. At any rate, it was up to him to show
that any one else had a say in their affairs and he never did so."
 C. Evans & Sons Ltd. v. Spritebr and Ltd., [1985] 2 All ER 415 was a
case of copyright. The first defendant was a company of which the
second defendant was a director and managing executive and which,
since 1973, had manufactured on behalf of the plaintiff company,
scaffolding components in accordance with specific drawings the
copyright in which belonged to the plaintiff. The plaintiff brought an
action under the Copyright Act, 1956 against the first and second
defendants, alleging an infringement of its copyright in the designs of
the scaffolding components between 1979 and 1981. The plaintiff
further alleged that the second defendant had been at all material times
the director and managing executive of the first defendant and that he
had authorised, directed and procured the first defendant in breaching
the plaintiff's copyright in the designs of the scaffolding components
and was therefore personally liable to the plaintiff. It was held that there
was no principle that a director of a company who had authorised,
directed and procured the commission by a company of a tortious act,
such as infringement of copyright falling within sections 1 (2) and 3(5)
(a) of the Copyright Act, could in no circumstances be personally liable
to the injured party unless it was proved that he had committed the acts
in the knowledge that they were tortious, or had acted recklessly
without caring whether they were or not. It followed that the judge had
been right to reject the second defendant's submission that the plaintiff
had to prove further that he had acted with the knowledge that the first
defendant's acts were tortious.
 Where the property of a company is held by trustees under an express
or implied trust, the court would disregard the corporate personality and
enforce the trusts, even though, in theory, the company would be
entitled to deal with the property in any way it pleases -Abbey Malvern
Wells Ltd. v. Minister of Local Government & Planning [1951] Ch. 728.
 Sir Dinshaw Maneckjee Petit, Bart, In re. AIR 1927 Bom. 371, the
assessee owned all shares (except 3 held by his subordinate). The
assessee had full control over the company. The company did no
business, apart from receiving dividend and debiting it in asssessee's
account as loan. Profits were deemed to have been received by the
assessee and he was charged super-tax. It was held that the court was
 entitled to go into the question as to whether the so-called one man
company was really a business carried on by the assessee himself for
the purposes of avoiding payment of tax. The company was not a
genuine company at all, but merely the assessee himself disguised
under the legal entity of a limited liability company. The company was
formed by the assessee purely and simply as a means of avoiding
super-tax and the company was nothing more than the assessee
himself. It did no business but was created purely and simply as a legal
entity to ostensibly receive the dividends and interest and hand them
over to the assessee as pretended loans.
 In CIR v. Shri Meenakshi Mills Ltd. [1967] 63 ITR 609 (SC), moneys
were lent at interest outside British India and brought into British India.
Loan was taken by the assessee at a branch in British India. Whether
this was part of an arrangement or scheme between the assessee and
bank was the question. It was held on the facts that the entire
transaction formed part of a basic arrangement or scheme between the
respondent companies (assessees) and the bank that the moneys
deposited by the respondent companies at Pudukottai should be
brought into British India after they were taken by the bank outside the
taxable territories.
 Juggilal Kamlapat v. CIT 73 ITR 702 (SC) is important. In that case the
managing agency of a firm was terminated and a company appointed
as managing agents. Compensation was paid to the firm for
termination of agency. It was held that in cases such as this, the
income-tax authorities were entitled to pierce the veil of corporate
personality and look at the reality of transaction. It was true that from
the juristic point of view, the company was a legal personality entirely
distinct from its members, and the company was capable of enjoying
rights and being subjected to duties which were not the same as those
enjoyed or borne by its members. But in certain exceptional cases, the
court was entitled to pierce the veil of corporate entity and pay regard
to the economic realities behind the legal facade. The court had power
to disregard the corporate entity if it was used for tax evasion or to
circumvent tax obligations or to perpetrate fraud. There was proper
material before the Tribunal in support of its finding that the receipt of
Rs.2,00,000 was a receipt in the course of its managing agency
business and hence a revenue receipt. The managing agency asset
was enjoyed by the four individual partners in a different capacity with
the same object of profit-making. There was, therefore, no destruction
of the apparatus of the profit-making assets, i.e., managing agency
contract.
 In Tata Engineering & Locomotive Co. Ltd. v. State of Bihar AIR 1965
SC 40, the Supreme Court held that corporations and companies, not
being citizens, cannot petition under article 32 of the Constitution. In
such a case, the doctrine of lifting the veil of corporation cannot be
allowed. The corporation in law is equal to a natural person and has a
legal entity of its own. The entity of the corporation is entirely separate
from that of its shareholders. It bears its own name and has a seal of
its own ; its assets are separate and distinct from those of its members.
In the course of time, the doctrine that the corporation or a company
 has a legal and separate entity of its own has been subjected to certain
exceptions by the application of the fiction that the veil of the
corporation can be lifted and its face examined in substance. There is
no scope for applying the doctrine of lifting the veil of a corporation to
hold that when a petition is made on behalf of a company, it is the
shareholders who are really moving the court under article 32 and so
the existence of the legal and juristic separate entity of the petitioners
as a corporation or a company should not make the petitions filed by
them under article 32 incompetent. If the corporations and companies
are not citizens, it means that the Constitution intended that they
should not get the benefit of article 19 of the Constitution. It should,
however, be mentioned that in a subsequent decision, the Supreme
Court has held that shareholders of a company can challenge the
validity of a law on the ground of infringement of article 19 and in such
a petition, the company can be joined - Bennett Coleman v. Union of
India AIR 1973 SC 106 and DFO v.Biswanath Tea Co., AIR 1981 SC
1369.
 In Workmen Employed in Associated Rubber Industry Ltd., v.
Associated Rubber Industry, Ltd., AIR 1986 SC 1, it was found that a
new company was created wholly owned by the principal company,
with no assets of its own, except those transferred to it by the principal
company and with no business or income of its own except receiving
dividends from shares transferred to it by the principal company. The
Supreme Court held that the new company was formed as a device to
reduce the gross profit of the principal company and thereby reduce
the amount to be paid by way of bonus to workmen. The amount of
dividend received by the new company should therefore be taken into
account in assessing the gross profit of the principal company. It is the
duty of the court, in every case where ingenuity is expended to avoid
taxing and welfare legislations, to get behind the smokescreen and
discover the true state of affairs. The court is not be be satisfied with
mere form. One finds, however, that not in every case will the court
adopt this stringent attitude.
 In LIC v. Escorts AIR 1986 SC 1370, overseas companies invested in
the shares of Escorts Ltd., under the Non-Resident Portfolio
Investment Scheme. 12 out of whose shares were owned 100 per cent
and 13 out of whose shares were owned 98 per cent by Caparo Group
Ltd., and 61.61 per cent of the shares of Caparo Group Ltd. were held
by Swaraj Paul family trust, 100 per cent of whose beneficiaries were
Swaraj Paul and members of his family, all non-resident individuals of
Indian origin. It was argued before the Supreme Court that the 13
companies were 13 companies only in name and that, for all practical
purposes, they were one, and that one was an individual, Mr. Swaraj
Paul. One had only to pierce the corporate veil to discover Mr. Swaraj
Paul lurking behind. It was argued that 13 applications were made on
behalf of 13 companies in order to circumvent the investment scheme
which prescribed a ceiling of 1 per cent on behalf of each non-resident
of Indian nationality or origin, or each company 60 per cent of whose
shares were owned by non-residents of Indian nationality/origin. After
mentioning that the circumstances for lifting the corporate veil had
 been stated in Palmer's Company Law and Gower's Company Law and
also the cases relied on in the context, the Supreme Court observed
that generally the corporate veil might be lifted where a statute itself
contemplated lifting the veil or fraud or improper conduct was intended
to be prevented, or a taxing statute or a beneficent statute was sought
to be evaded or where associated companies were inextricably
connected so as to be, in reality, part of one concern. It was neither
necessary nor desirable to enumerate the classes of cases where
lifting the veil was permissible, since that must necessarily depend on
the relevant statutory or other provisions, the objects sought to be
achieved, the impugned conduct, the involvement of the element of the
public interest, the effect on parties who might be affected, etc. In view
of the aforesaid, the Supreme Court, in Escorts' case (supra), held that
lifting the veil was not necessary or permissible beyond the
requirement of the Foreign Exchange Regulation Act ('FERA') and the
Portfolio Investment Scheme. It observed : "We have noticed that the
object of the Act is to conserve and regulate the flow of foreign
exchange and the object of the FERA is to conserve and regulate the
flow of foreign exchange and the object of the scheme is to attract non
- resident investors of Indian nationality or origin to invest in shares of
Indian companies. In the case of individuals, there can be no difficulty
in identifying their nationality or origin. In the case of companies and
other legal personalities, there can be no question of nationality or
ethnicity of such company or legal personality. Who of such non-
resident companies or legal personalities may then be permitted to
invest in shares of Indian companies? The answer is furnished by the
scheme itself which provides for 'lifting the corporate veil' to find out if
at least 60 per cent of the shares are held by nonresidents of Indian
nationality or origin. Lifting the veil is necessary to discover the
nationality or origin of the shareholders and not to find out the
individual identity of each of the shareholders. The corporate veil may
be lifted to that extent only and no more."

15. Salomon v. Salomon still vital

Notwithstanding the extensive literature connected with 'lifting the corporate

veil', one should not forget that the conventional view that a company is a
distinct legal entity still holds the field and after almost a century the old ruling
in Salomon's case (supra) retains its vitality. The courts insist upon very
strong evidence for displacing it Thus, a Government company is not
regarded as an agent or trustee of the state (except for writ purposes) unless
it is performing sovereign (as opposed to commercial) functions - Praga Tools
Corpn. v. Inamuel AIR 1969 SC 1306; Tamlin v. Hannaford [1950] 1 KB 18.
The property of a Government company has been held to be not that of the
State - Bharat Aluminium Co. Ltd. v. Special Area Development Authority
[1981] 51 Comp. Cas. 184 (MP). A transport company in which all the shares
were held by the Transport Commission was held to be not acting as an agent
for the Commission - Ebbow Wale UDC v. S. Wales Traffic Area Licensing
Authority [1951] 2 KB 366 (CA). A wholly owned subsidiary company is also
viewed to be as distinct from its parent as any other company - Free Wheels
(India) Ltd. v. Dr. Veda Mitra AIR 1969 Delhi 258, except when the parent
controls its activity in all respects-fle. F.G. Films Ltd. [1953] 1 WLR 483.

The fact that in certain cases companies have to give a "group accounts"
[section 212 - 214 of the Companies Act] does not impair their individuality.
Documents in the custody of a subsidiary company are not necessarily in the
custody of the holding company - Lonrho Ltd. v. Sell Petro-leum Co. Ltd.
[1980] 2 WLR 367 (CA). A holding company is not liable for its insolvent
subsidiary company -Re Southard & Co. Ltd. [1979] 1 WLR 1198. All these
rulings show the vitality of Salomon's case {supra).

16. Benami transactions

At this stage, it is necessary to examine the position resulting from the

Benami Transactions (Prohibition) Act, 1988. Section 3(1) of that Act prohibits
any one from entering into any benami transaction and section 4 (1) provides
as under :

"(1) No suit, claim or action to enforce any right in respect of any property held
benami against the person in whose name the property is held or against any
other person, shall lie by or on behalf of a person claiming to be the real
owner of such property."

This is subject to exceptions regarding trusts and Hindu undivided families. If

property is held benami, then section 4(1) prevents recovery by the real
owner. Section 5 of the said Act provides for the acquisition of benami
property by the Government As regards the impact of the legislation on the
doctrine of lifting the corporate veil, only time will tell us how far it has got any
important consequences. This is a matter that calls for a separate analysis.

17. Aspect of statutory construction - Supreme Court in Renusagar's

case

The latest Supreme Court judgment on the subject of lifting the corporate veil
is of interest in the field of exemption from tax. That case was also discussed
in passing in para 6.1 in a limited manner. Before discussing it further, it may
be mentioned that there are so many angles from which the doctrine can be
approached. Application of the doctrine in a particular case can be taken as
an example of judicial creativity - an aspect welcome to writers on
jurisprudence and on the judicial method. For students of corporation law,
such concrete cases may, again, supply useful material for bearing in mind
how the conservative doctrine that a company is different from its components
may come to be modified. Again, students of legal history will see a parallel
between the equitable jurisdiction evolved in the Court of Chancery to correct
the hardship of the common law and the corrective jurisdiction assumed by
the courts by lifting the corporate veil, thus modifying the full operation of a
statutory fiction. At the present stage, it may be of some use to develop the
theme of statutory construction. In Renusagar's case (supra), the question
was whether a holding company, using power generated by its subsidiary, can
be described as utilising its 'own source of generation' within the meaning of
section 3(l)(c) of the U.P. Electricity Duty Act, 1952, where under a
concessional rate of duty is provided for such consumption. The Supreme
Court answered the question in the affirmative, after reviewing the important
decisions on the subject. The crucial reasoning of the Supreme Court is as
follows :

"As the facts make it abundantly clear all the steps for establishing and
expanding the power station were taken by Hindalco. Renusagar is
whollyowned subsidiary of Hindalco and is completely controlled by Hindalco.
Even the day-to-day affairs of Renusagar are controlled by Hindalco.
Renusagar has at no point of time indicatedany independent volition.
Whenever felt necessary, the State or the Board have themselves lifted the
corporate veil and have treated Renusagar and Hindalco as one concern and
the generation in Renusagar as the own source of generation of Hindalco. In
the impugned order, the profits of Renusagar have been treated as the profits
of Hindalco."

18. Object of the statute

As a matter of statutory construction, this approach harmonises with the well-

known rule that in construing a statute it is permissible to have regard to the
object of the statute. This is a rule which necessarily had to be evolved by the
courts because of the inherent elasticity of most words. One of the elementary
rules of the interpretation of statutes is that, when there is a doubt about their
meaning, the words of the statute are to be understood in the sense in which
they best harmonise with the object of the enactment. In dealing with matters
relating to general public, statutes are presumed to used words in their
popular rather than the narrowly legal or technical sense. This is particularly
so when the narrow interpretation is bound to defeat the object of the Act.
General words and phrases are more or less elastic and admit of restriction or
extension to suit the legislation in question, however wide they may be in the
abstract. It is also well recognised that if there is any ambiguity in the
phraseology of a statute, that construction which facilitates the remedying of
the potential abuse is to be preferred, and it is the duty of the court to place
such construction as shall suppress the mischief and advance the remedy.
While interpreting various Land Reform Acts, the Supreme Court has also
adopted a similar approach, as is clear from the decision reported in Chemeli
Wati v. Delhi Municipal Corporation AIR 1986 SC, 1191, Buddhan Singh v.
Babi Bux AIR 1970 SC 1880, State of Andhra Pradesh v. Mohd. Ashrafuddin
AIR 1982 SC 913 and Begulla Bapi Raju v. State of Andhra Pradesh AIR 1983
SC 1073. It may be mentioned that the principle that the object of the statute
is to be borne in mind in construing it, can be traced to the dictum of Chief
Justice Abbot in R. v. Hall. [1822] 107 ER 47 cited with approval in the Privy
Council by Lord Romilly in Re Lyne [1861] 16 ER 688 (PC). This was quoted
again by Maxwell and the Supreme Court of India has adopted it in Workmen
of Bimakuchi Tea Estate v. Management of Bimakuchi Tea Estate AIR 1958
SC 355 : "The words of a statute, when there is a doubt about their meaning;
are to be understood in the sense in which they best harmonise with the
subject of the enactment and the object which the legislature had in view.
Their meaning is found not so much in a strict grammatical or etymological
propriety of language, nor even in its popular use, as in the subject or in the
occasion on which they are used, and the object to be attained."

18.1 The Supreme Court in Renusagar's case was confronted with a very
simple English word 'own'; the court could have placed a literal construction
and given dominance to the technical legal aspect by reiterating the
conservative doctrine that a company is a distinct personality. But the court
chose not to be bound down by that doctrine. Rather, it expanded the region
of the word 'own' by allowing it to embrace within its sweep an undertaking
technically owned by another company, but substantially and exclusively
utilised by the holding company. It is not that the words were disregarded ; but
they were applied in a particular manner. Once more, the judgment bears out
the truth of a wellknown judicial comment often cited in academic literature :
words, in addition to a hard central core of meaning, have a 'penumbra, a dim
fringe' - Commissioner v. Ickelheimar, 132 F. 2d 660, 662, referred to by
Archibold Cox, "Judge Learned Hand : An Interpretation" 60 Harvard Law
Review 370, 372.

19. Conclusion

The above selective survey will, it is hoped, bring out some important facets of
lifting the corporate veil. In the first place, this is an indefinite concept and
much depends on the equities of the case and the requirements of public
interest. Secondly, it would be a serious misconception to suppose that the
doctrine always acts in a restrictive way so as to take away some benefit or
impose some burden by lifting the veil. In many situations, its invocation leads
to a positive benefit being conferred upon someone in whose favour the veil is
lifted. Thirdly, the spheres in which the doctrine operates are as wide apart as
property, trusts, tort and contract. Fourthly, the extension of criminal liability in
the corporate field is best left to statutory provisions rather than to the courts.
Finally, in banking transactions, it is advisable to adhere to the orthodox
proposition that a company is distinct from its members and directors. In this
sense, the authority of Salomon (supra) still holds the field.

There have been long standing controversies about the corporate personality
in both the UK and India. There has been a growing realisation that one
should not be allowed to get away with what is grossly improper or unfair or
inequitable by merely putting on the company cloak. Salomon could cock a
snook at his creditors, sheltered by Salomon & Co. in 1897 - Salomon v.
Salomon & Co. [1897] AC 22 ; but specific performance was ordered against
a company to which the defendant had transferred his property to avoid such
an action against himself, 60 years later - Jones v. Lipmam [1962] 1 All ER
442. The courts have, in recent years, made it clear that they would like to
look at the economic consequences of transactions rather than their format -
Furniss v. Dawson [1984] 1AU ER 530 (HL). The flight of profits to tax
sanctuaries like Jersey, Bermudas, etc., to escape legitimate tax liability,
contributed, among other things, to this development- In re Westons'
settlements [1960] 1 Ch.223 and WallerSteinerv.Moir[1974]l WLR991,but
efforts to provide tax relief may also result sometimes in the corporate identity
being disregarded. For example, the Finance Act, 1967 introduced a new
form of relief in the UK called 'group relief by which a member of a group of
companies could surrender its claim to relief for capital allowance, etc., to
another company which was a member of the same group (called the
claimant company).Two companies were taken to belong to a group, if one of
them was a 75 per cent subsidiary of the other or both were 75 per cent
subsidiaries of a third company. One of the oldest debates in corporate
taxation pertains to the issue where there is double taxation when a company
pays tax on its own income and its shareholders are required to pay further
tax on the dividend they derive from it. There is no uniformity on extent and
manner in which relief should be offered to the shareholders to mitigate the
hardship that the existing system causes. Shri Bakshi has referred to various
judgments of the Supreme Court in tracing the evolution of the doctrine of
'lifting the corporate veil' in India. The following cases supplement his citations
and should serve to show that the courts in India do not hesitate to intervene
when any attempt is made by anyone to evade his legal obligations through
the corporate status:

 PNB Finance Ltd. v. Shital Prasad Jain [1983] 54 Comp. Cas. 66

(Delhi) where the corporate entity was attempted to be used for a
fraudulent purpose.
 Jyoti Ltd. v.KanwaljitKaurBhasin[1987] 62 Comp. Cas. 626 (Delhi)
where the corporate shield was blatantly used to disobey the orders of
the court willfully.
 Tracway (P) Ltd. v. CST [1981] 47 (MP) where a private company was
constituted by the partners of a firm to frustrate sales tax liability.
 Wood Plymer Ltd., In re. ; Bengal Hotels Ltd., In re [1977] 109 ITR 177
(SC) where the object of amalgamation of two companies was to
transfer a capital asset to avoid the capital gains tax.
 Workmen of Associated Rubber Industry Ltd. v. Associated Rubber
Industry Ltd. [1986] 157 ITR 77 (SC) where a wholly owned company
was used to reduce the amount of bonus payable to the workmen.
 Shri Ambica Mills Ltd., In re. Exparte Jaykrishna Harivallabhdas [1986]
59 Comp. Cas. 368 (Guj.) where the managing director, being an
officer of the company, was required to support the company's petition
under section 101, instead of pleading ignorance of the proceedings.

The following observations of Mr. Justice Chenneappa Reddy in the case

mentioned last above are a pointer to the judicial approach to corporate
claims:

"It is the duty of the court, in every case where ingenuity is expended to avoid
taxation and welfare legislation, to get behind the smoke-screen and discover
and true state of affairs. The court is not to be satisfied with form and leave
well alone the substance of a transaction.... Avoidance of welfare legislation is
as common as avoidance of taxation and the approach in considering
problems arising out of such avoidance has necessarily to be the same".
Judicial interpretation apart, extensive inroads have also been made by the
Legislature on the concept of the separate personality of a company, as
stressed by Mr. Justice S. Ranganathan in his book on Corporate Taxation in
India, pp. 102 -107 (Documentation Centre for Corporate and Business Policy
Research, New Delhi, 1982). Being, in essence, no more than a group of
individuals bound by a common memorandum and articles, a company is not
immune from any of the frailties to which individuals are susceptible. It is their
ingenuity and their proneness to succumb to the temptation to get round the
law that drive the Legislature to make frequent changes in the law. In the
past, the revenue authorities were required to ascertain the place (in or
outside India) where the management and control of a company lay, the
relationship between the directors and other shareholders and the extent of
their controlover a company's voting power, the adequacy of the grounds for a
closely held company's not distributing the prescribed percentage of its
income as dividends, and so on. Many of the old provisions have lost their
relevance now but several stringent provisions are still applicable to private
companies. Section 179 dealing with the liability of the directors of a private
company in liquidation and section 79 denying the benefit of offset of carried
forward losses to subsequent years, where there is any change in the shares
holding are typical instances of the statutory disregard of the separate identity
of a company. A 'dividend' is defind in section 2 (22) of the Income-tax Act to
include an advance of loan to a shareholder of a company in which the public
are not substantially interested and also any concern in which the shareholder
is a member or a partner and in which he has a 'substantial interest'.
Section43 (2) of the Delhi Shops & Establishments Act, 1954 treats the
corporate facade with equal contempt. In the case of a private company
owning an establishment in Delhi, any of its shareholders may be prosecuted
and punished under the Act for any offence for which the employer in the
establishment is punishable.

Government companies have not been unaffected by this new trend in which
the distinction between a company and its shareholders is getting blurred. Mr.
Justice Krishna Iyer puts the new concept in his inimitable style in Som
Parkash Rekha v. Union of India [1981] 51 Comp. cas. 71 (SC):

"The government company is a mini - incarnation of government itself, made

up of its blood and bones and given corporate shape and status for defined
objectives, not beyond".

It is interesting to note that a government company's claim for exemption for

sales-tax was turned down in National Insurance Co. Ltd. v. Union of India
[1982] 49 STC ISO (Delhi) and the same view is taken even now whenever
the Government, State or Central, dons the gown of a company for
undertaking any commercial activity. But the court's attitude to employees'
rights and treatment in government undertakings is different. The following
observations in Central Inland Water Transport Corporation v. Brojo Nath
Ganguly [1986] 60 Comp. Cas. 797 (SC) sums up the current thinking of the
court :

"If there is an instrumentality or agency of the State which has assumed the
garb of a government company as defined in section 617 of the Companies
Act, it does not follow that it thereby ceases to be an instrumentality or
agency of the State. For the purpose of article 12 of the Constitution, one
must necessarily see through the corporate veil to ascertain whether behind
that veil is the face of an instrumentality or agency or the State".

This was a case where the hire-and-fire concept which is supposed to keep
executives on their toes, was tested.

The court or the Legislature steps in only when fiscal or legal obligations are
sought to be bypassed by a corporate entity. But the damage to the corporate
personality is sometimes done not by an external agency but by those who
control a corporation. Companies have been seen caught in destructive family
feuds; and mutual mudslinging between industrial giants is also not an
unknown phenomenon. The court does not have to lift the corporate veil in
such cases; it is ripped up by the companies themselves. In these
circumstances, if there is cynical indifference among the public to the decline
in the corporate status, who is to blame for it? And what is the remedy?

The economists' anxiety to avoid double taxation of corporate profits, once in

their own assessments and for a second time in the hands of the
shareholders when they receive any dividend, indicates another point of view.
The government have so far been proceeding on the assumption that section
80L of the Income-tax Act, in terms of which a limited deduction is available
for dividend income, provides adequate relief incentive to shareholders. But
the "split system" under which the distributed profits of a company are
exempted from tax and other methods of taxing a company have been
convassed as better alternatives to the "classical system" prevailing in India. It
remains to be seen whether such treatment will further erode the inviolability
of the corporate status.