1. ▪ Advantages of Inc.
▪ Lifting of Corp. Veil
Naina Dilip Khetpal
SYLLB Roll No. 40
2. • Section 2(20) “company” means a company incorporated under this Act or under any previous
company law
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• A company is called an artificial person by the law. It is called a legal person because it can
enter into a contract, own property in its own name, sue and be sued by others, etc.
• Company is an association of persons who have decided to register themselves as a company
3. • Separate Legal Entity
• Company has Perpetual Succession
• Can own Separate Property
• Capacity to sue and be sued
• Easier access to Capital
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4. Salomon v Salomon & Co. Ltd. (1897) AC 22
A company is independent and separate from its
members, and the members cannot be held liable for
the acts of the company, even when a particular
member owns majority of shares
Facts –
• Salomon transferred his business of boot making, initially
run as a sole proprietorship, to a company (Salomon Ltd.),
incorporated with members comprising of himself and his
family.
Court Held –
• The House of Lords held that, as the company was duly
incorporated, it is an independent person with its rights
and liabilities appropriate to itself, thus, making Salomon
& Co. Ltd liable, and not Salomon. 4
5. Re Noel Tedman Holdings Pty Ltd (1967)
Perpetual succession means continuous
existence, which means that a company never
dies
Facts –
• The company had a wife and husband as its only
shareholders and directors of the company. Both of them
died in an accident and only their infant child survive
Court Held -
• In this case Hon’ble court held that “a companies
members may come and go but this does not affect the
legal personality of the company”
• Court allowed personal representatives of the deceased
to appoint new directors that could agree on the transfer
of shares
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6. 6
Facts –
• The appellant Bacha Guzdar was a shareholder in two tea
companies & received dividends amounting to Rupees 2750.
• The appellant filed a suit refusing to pay Income Tax accruing on
the dividend income.
• The appellant claimed exemption to the extent of 60 % on the
ground that income received as dividend was by engaging in
agricultural activities.
Court Held –
• Hon’ble Supreme Court stated that a company being a legal
person, in which all its property is vested and by which it is
controlled, managed and disposed of a member cannot, ensure
the companies property on its own name
Bacha F. Guzdar v CIT Bombay AIR 740 (1955)
As a separate legal entity in the eyes of law, it can hold
property in its own name and the members cannot claim to
be the owner of the companies property(s)
7. 7
• A company, though can be sued or sue in its
own name, it has to be represented by a
natural person and any complaint which is not
represented by a natural person is liable to be
dismissed in the same way in which an
individual complaint is liable to be dismissed in
the absence of the complainant.
The company has the capacity of suing a person
or being sued by another person in its own name
8. 8
• This may make it easier for your business to
grow and develop. If the in the market for a
bank loan, that’s another reason to
incorporate, since in most cases, banks prefer
and easily lend money to incorporated
business ventures.
Raising capital is easier for a corporation, since
a corporation can issue shares of stock.
9. A corporate veil is a legal concept that separates the acts done by the companies and
organizations from the actions of the shareholders
Salomon vs Salomon & Co Limited (1897)
Facts –
• Salomon transferred his business of boot making,
initially run as a sole proprietorship, to a company
(Salomon Ltd.), incorporated with members
comprising of himself and his family.
Court Held –
• It was held that the company is a real and legal
company, fulfilling all legal requirements. It had an
identity different from its members and therefore, the
unsecured creditors were to be paid at priority from
the secured debentures
Lee vs Lee Air Farming Limited (1960)
Facts –
• In 1954, Mr. Lee (appellant’s husband) formed the company
named Lee Air Farming Limited.
• He was the sole director and owner of the company. The
share capital of the company was 3000 Euros, Lee held 2999
shares and the remaining 1 share was held by his wife.
• Lee Air Farming limited had entered into a contract of
insurance policies for its employees.
• Mr. Lee was also an employee, and was killed while piloting.
Lee’s wife claimed compensation which was denied by the
Court, claiming a person cannot employ himself as the
employee.
Court Held –
• The court held that since there was a valid contract of service
between Mr. Lee and Lee Air Farming Limited and neither
had Mr. Lee acted fraudulently, Mrs. Lee is entitled to claim
compensation on the ground of him being a worker.
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10. 10
Where the Company is a Sham (Fraud)
The most common ground when the courts lift the corporate veil is when the members of the
company are indulged in fraudulent acts.
Gilford Motor Company vs Horne (1933)
Facts –
• Mr. Horne served as the former MD of Gilford Motor Home Company Ltd.
• His employment contract included a clause prohibiting him from soliciting the company’s clients after he
left.
• Mr. Horne was dismissed from his employment and post. Following that, he formed a competitive firm
with his wife, himself, and one of his friends as the only owners.
Court Held –
• The Corporation was put up to avoid Horne’s contractual accountabilities and was utilised as a fraud tool
to hide Mr. Horne’s illegal acts, according to the court. The court also ordered an injunction against him,
piercing the corporate veil.
11. RG Films Ltd (1953)
Facts –
• An American business sponsored the production of a movie in India under the name of a British
company, and the president of an American company owned 90% of the shares in the British firm.
• The corporation had no additional assets beyond its registered office and no employees.
Court Held –
• The ruling was upheld due to the fact that the British firm was only acting as a nominee for the American
corporation.
• Here, the court ordered lifting of corporate veil and it was determined that the theory of distinct legal
entity does not imply that the business would operate as a simple agent of the shareholders.
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Invocation of the principal of agency
The principle of corporate veil may be disregarded when it is necessary to identify the principle
and agent in connection with an inappropriate activity undertaken by the agency.
12. 12
Public Policy
When a company’s actions are in violation of public policy or the public interest, courts have
the authority to pierce the veil and hold those who are personally accountable.
Connors Bros vs Connors (1940)
Facts –
• The company’s members prompted the court to invoke the principle of lifting of corporate veil in order to
penalize the offenders since the firm was created to carry out an activity that was against public policy.
• The concept was used upon the managing director who abused his position by acting in a way that was
against public policy
Court Held –
• Since the people who were de facto residents of Germany, which was at war with the British at the
period, the House of Lords ruled that the firm was an enemy company.
• The alien firm was not permitted to continue with the act because it was regarded against state policy
because it directly or indirectly involved sending money to the enemy
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Determining True Character of the Company
Where the goal of forming a business is to solely make profits. A corporation will not
intentionally try to do good for society. It may, although, choose to inflict harm instead
Daimler Co. Ltd vs Continental Tyre and Rubber Co.
Facts –
• A German business formed a private company in England for selling motor tyres made in Germany.
• The German firm owns virtually all of the business’s shares, and all of the company’s directors are
Germans
Court Held –
• The House of Lords held that the firm was an enemy company for the purpose of trade since its effective
control or administration was in the arms of Germans.
• The court determined that if there is a trade between them, it would be against the public policy, and so
the firm will not be permitted to proceed with the action
14. Vodafone International Holdings B.V. v. Union of India & Another
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Protection of Revenue (Tax Evasion)
It is the responsibility of every earner to pay their fair share of taxes. In the perspective of the law, a corporation is no
different from a person. Anyone who tries to escape this responsibility in an illegal manner is considered to be
committing an offence
Facts –
• Vodafone, a company which was incorporated in the Netherlands acquired CGP investments (a company
from Cayman Islands) which was controlled by, Hutchinson a company of Hong-Kong. CGP investments
held 67% shares in Hutchinson-Essar Ltd., which was Hutchinson‘s Indian mobile business company.
The Indian income tax authorities contended that, since capital gains were made by Hutchinson in India,
therefore they stated that Vodafone was withholding tax and it should pay a sum of 110 Billion rupees.
Court Held -
• Bombay HC ruled in favour of the Income tax authorities which went to appeal in the apex court. Where
the decision of the Supreme Court was very pro-business, it clearly demarcated the lifting of corporate
veil, when there are cross border transactions and tax issues