ANALYSIS OF THE LIFTING OF THE CORPORATE VEIL

The principle of the lifting of the corporate veil is a crucial doctrine pertaining to companies

that is highly relevant under corporate law. The first part of the paper will explain the concept

of the corporate veil and the necessary constituent parts. The second part of the paper will

analyze the statutory provisions that allow the courts to implement the doctrine of lifting of

the corporate veil.

In order to thoroughly understand the underlying concept of the lifting of the corporate veil, it

is crucial to analyze certain essential components, like the concept of a company and

corporate personality. In the present case, it is important to understand what a company is,

because the concept of the lifting of the corporate veil is applicable to companies. Section

2(20) of the Companies Act of 2013 defines the company as a “company incorporated under

this Act or under any previous company law”. In the case of Rustom Cavasjee Cooper vs

Union of India1, the Supreme Court held that “a company registered under the Companies

Act is a legal person, separate and distinct from its individual members”. The case of

Salomon v. A Salomon & Co. Ltd. 2established the English Law principle that the company is

a legal person separate and distinct from the members of that company. A company has also

been considered to be a legal entity that has the feature of perpetual succession. Perpetual

succession of a company refers to the continuous succession of a corporation, which makes

the company an immortal entity. Therefore, a company or a corporation is defined as “a

franchise that is possessed by one or more individuals, who subsist as a body politic under a

special denomination with the capacity of perpetual succession”3.

1
Rustom Cavasjee Cooper vs Union of India1, 1970 AIR 564

2
Salomon v. A Salomon & Co. Ltd
3
State ex rel. Walker v. Payne, 129 Mo. 468 (Mo. 1895)
The corporate personality is “the distinct status of a business organisation that has complied

with the law for its recognition as a legal entity and that has an independent legal existence

from that of its officers, directors and shareholders”4. It also “encompasses the capacity of a

corporation to have a name of its own, to sue and not be sued and to have the right to

purchase, sell, lease and mortgage its property in its own name”5. Thus, the corporate

personality is one of the most fundamental principles of company law because it is the main

principle that establishes that a company is a legal entity that is “distinct from the

shareholders that constitute it”6.

The doctrine of limited liability is can be understood as the legal protection available to the

shareholders of both private and public companies under which the shareholder’s financial

liability for the company’s debts and obligations is limited to the face value of their fully paid

up shares7.

This rudimentary understanding of the concept of the company, corporate personality and

limited liability will help us understand the concept of the lifting of the corporate veil.

The concept of the lifting of the corporate veil is a concept that has been studied extensively

under corporate law. Once a company has been incorporated under the Companies Act, it is

established as a separate corporate personality with its own duties that are distinct from the

duties of the members due to which there is a “veil” between the company and its members

4
Definition of a corporate personality: https://legal-dictionary.thefreedictionary.com
5
Corporate personality: https://legal-dictionary.thefreedictionary.com
6
“Lifting of the Corporate Veil” https://www.lawctopus.com/academike
7
Limited Liability: http://www.businessdictionary.com
due to the separation between the company and its members. The lifting of the corporate veil

is a concept that was enshrined as an exception to the doctrine of limited liability, in order to

prevent the inevitable injustices that will occur if the company’s shareholders and directors

are not held liable for the actions and the debts of the company8. The lifting or the piercing of

the corporate veil involves “the court setting aside limited liability and holding the

corporation’s shareholders or directors personally liable for the corporation’s actions and

debts”9. The piercing of the corporate veil has also been described as the reluctance of the

court to “permit corporate presence and action to divert judicial course of applying law to

ascertain facts”10. This means that the shareholders will be held liable to discharge the

obligations of the company regardless of the fact that the company is a separate legal entity,

i.e., the company will be held liable as a natural person11. Therefore, the lifting of the

corporate veil can best be understood as the action of looking behind the veil of incorporation

of a company, at the separate personality of the company, in order to determine the

wrongdoing on the part of the members and hold them liable for it, in order to prevent them

to avoid hiding behind the veil of the company. The circumstances of the company as a

separate corporate body will thus be ignored and the corporate veil will be lifted by the

judiciary, in order to hold the individual shareholder liable for the wrongful acts committed

by him or her12.

The basis for invoking the doctrine of lifting of the corporate veil does not have a set policy

and the courts do not abide by a static legal framework to assess the validity of utilising the

8
Thomas K. Cheng, “The Corporate Veil Doctrine Revisited: A Comparative Study of the English and the U.S.
Corporate Veil Doctrines”, 34 B.C. International & Comparative Law Review 329 (2011)
9
Piercing the Corporate Veil: https://www.law.cornell.edu
10
“Lifting of the Corporate Veil” https://www.lawctopus.com/academike
11
“Lifting of the Corporate Veil” https://www.lawctopus.com/academike
12
P. Shanthini, “A Study on Lifting of Corporate Veil with reference to case laws”, International Journal of
Pure and Applied Mathematics, Vol. 120 No.5 (2018).
principle13. In order to combat this problem, the statutory provisions laid out under the

Companies Act of 2013 can be analysed in order to understand the circumstances under

which the corporate veil can be lifted14.

The utilisation of the correct name of the company is the most crucial out of all. The name of

the company must be registered under the memorandum of association as per Section 4 of the

Companies Act, 201315 (hereinafter referred to as “the Act”) and registered under Section 12

of the Act, on and from the fifteenth date of the incorporation16. Thus, any representative of

the company who enters incorrect particulars of the company during the course of paying

bills or signing documents on behalf of the company, will be held liable17.

A misstatement in the prospectus of the company will allow the court to lift the corporate

veil. Section 26(9) of the Act18 holds the company and the parties privy to the faulty

prospectus liable. The company shall be liable with a fine not less than fifty thousand that

extends up to three lakhs and the person privy to the prospectus shall be liable with a fine of

the same amount or a term of imprisonment that may extend up to three years. Section 34 of

the Companies Act19 establishes a criminal liability for the misstatements in prospectus made

by persons who knew it to be untrue, where any inclusion or omission could mislead the

person reading it. Section 35 of the Companies Act establishes a civil liability for the same.

Thus, under these three statutory provisions of the Act, deliberate misstatements made under

the prospectus will allow the court to lift the corporate veil and the relevant parties will be

punished with a fine or with imprisonment for a certain period.

13
Principle of Lifting of the Corporate Veil: http://www.legalservicesindia.com
14
Principle of Lifting of the Corporate Veil: http://www.legalservicesindia.com
15
Companies Act, 2013: Section 4
16
Companies Act, 2013: Section 12
17
“Lifting of the Corporate Veil” https://www.lawctopus.com/academike
18
Companies Act, 2013: Section 26(9)
19
Companies Act, 2013: Section 34
As a general rule, any form of fraud will allow the court to lift the corporate veil and hold the

parties liable. In similar fashion, Section 44820 holds that if “any return, report, certificate,

financial statement, prospectus, statement or other document”21 furnishes any false

statements, then the person will be held liable under Section 447 of the Act22, which allows

for a period of imprisonment not less than six months but which may extend to ten years, or a

fine that is either equal to or three times the amount of the fraud. Section 3623 also holds a

person liable under Section 447 of the Act, if they fraudulently induce persons to invest

money in the company. Similarly, Section 339 establishes liability for persons who have

utilised the name of the company for fraudulent activity, during the course of winding up the

company.

Under Section 39(3) of the Act24, a failure to return the application money will also allow the

courts to apply the principle. Section 39 (3), which deals with the allotment of securities,

holds that if the stated minimum amount has not been subscribed to and the sum to be paid is

not received even after 130 days from the issue of the prospectus, then the directors of the

company will be jointly and severally be held liable to pay the amount with interest25. Thus,

these are the main and the most crucial provisions which can be utilised to allow the courts to

lift the corporate veil in order to hold the parties liable, if they act in contravention with any

of these statutory provisions.

Therefore, it can be concluded that the principle of lifting of the corporate veil is an

invaluable tool, in the hands of the judiciary, that prevents the directors, shareholders and

other persons of the company from hiding behind the veil of incorporation and fully facing

the consequences for their actions.

20
Companies Act, 2013: Section 448
21
“Lifting of the Corporate Veil” https://www.lawctopus.com/academike
22
Companies Act, 2013: Section 447
23
Companies Act, 2013: Section 36
24
Companies Act, 2013: Section 39 (3)
25
“Lifting of the Corporate Veil” https://www.lawctopus.com/academike