2. THE VEIL OF CORPORATE PERSONALITY
• After incorporation a company becomes a legal
person separate and distinct from its members.
It has a corporate personality of its own with
rights, duties and liabilities separate from those
of its individual members.
• A veil of incorporation exists between the
company and its members and due to this a
company is not identified with its members.
3. The most illustrative case in this regard is the
case decided by House of Lords- Salomon v. A
Salomon & Co. Ltd.
In this case, Mr. Salomon had the sole
proprietorship business of shoe and boots
manufacture. later a company (Salomon & Co. Ltd.)
was incorporated by Salomon with seven
subscribers-Himself, his wife, a daughter and four
sons.
All shareholders except him held only one share
each.
The company purchased the business of Salomon
for 39000 pounds.
4. The company in less than one year ran into
difficulties and liquidation proceedings
commenced.
The assets of the company were not even
sufficient to discharge the liabilities of the company.
The House of Lords unanimously held that the
company had been validly constituted, since the Act
only required seven members holding at least one
share each and that Salomon is separate from
Salomon & Co. Ltd.
Thus Saloman was not personally liable
5. LIFTING THE VEIL OF CORPORATE PERSONALITY
• It may be understood that sometimes in order to
protect themselves from the liabilities of the
company its members often take the shelter of the
corporate veil.
• Sometimes these corporate veils are used as a
vehicle of fraud.
• To prevent unjust and fraudulent acts, it becomes
necessary to lift the veils to look into the realities
behind the legal face and to hold the individual
member of the company liable for its acts. The
corporate veil has been lifted by the courts and
legislatures both for the interest of equity, justice
and good conscience.
6. Lifting of Corporate veil:
At times it may happen that the corporate
personality of the company is used to commit
frauds or illegal acts.
Since an artificial person is not capable of doing
anything illegal or fraudulent, the veil of corporate
personality might have to be removed to identify
the persons who are really guilty.
This is known as ‘lifting of corporate veil’.
7. It refers to the situation where a shareholder is
held liable for its corporation’s debts despite the
rule of limited liability and/of separate
personality.
The veil doctrine is invoked when shareholders
blur the distinction between the corporation and
the shareholders.
A company or corporation can only act through
human agents that compose it.
8. 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 distinct and
separate from those of its members; it can sue and
be sued exclusively for its purpose; liability of the
members are limited to the capital invested by
them.
9. In course of time, the doctrine that a company has a
separate and legal entity of its own has been
subjected to certain exceptions by lifting of the veil .
It is when we look behind the smoke-screen of the
company and find the individual who can be
identified with the company.
As a consequence of the lifting of the corporate veil,
the company as a separate legal entity is
disregarded and the people behind the act are
identified irrespective of the personality of the
company. So, this principle is also
called “disregarding the corporate entity”.
10. LIFTING THE CORPORATE VEIL
Lifting the corporate veil refers to the possibility of
looking behind the company’s framework (or
behind the company’s separate personality)
This is done to make the members liable, as an
exception to the rule that they are normally
shielded by the corporate veil i.e. they are normally
not liable to outsiders or they are normally liable to
pay the company what they agreed to pay by way of
share purchased or guarantee).
11. The principle of veil of incorporation is a legal concept that
separates the personality of a corporation from the
personalities of its shareholders and protects them from
being personally liable for the company’s debts and other
obligations.
While a company is a separate legal entity, the fact that
it can only act through human agents that compose it,
cannot be neglected.
Since an artificial person is not capable of doing anything
illegal or fraudulent, the face of corporate personality might
have to be removed to identify the persons who are really
guilty.
This is known as lifting of the corporate veil.
12. The circumstances under which corporate veil may be lifted
can be categorized broadly into two following heads:
•Statutory Provisions
•Judicial interpretation
13. STATUTORY PROVISIONS
Section 5 of the Companies Act states that the individual
person committing a wrong or an illegal act to be held
liable as ‘officer who is in default’.
This section gives a list of officers who shall be liable to
punishment or penalty under the expression ‘officer who is
in default’ which includes a managing director or a whole-
time director.
14. Section 45– Reduction of membership below statutory
minimum:
This section provides that if the members of a company is
reduced below seven in the case of a public company and
below two in the case of a private company and
the company continues to carry on the business for more
than six months, while the number is so reduced,
every person who knows this fact and is a member of the
company is severally liable for the debts of the company
contracted during that time.
15. In the case of Madan lal v. Himatlal & Co. the respondent
filed suit against a private limited company and its directors
for recovery of dues.
The directors resisted the suit on the ground that at no
point of time the company did carry on business with
members below the legal minimum and therefore, the
directors could not be made personally liable for the debt
in question.
It was held that it was for the respondent being dominus
litus, to choose persons of his choice to be sued.
16. Section 147-
Mis description of name:
An officer of a company who signs any bill of
exchange, hundi, promissory note, cheque wherein
the name of the company is not mentioned in the
prescribed manner,
such officer can be held personally liable to the
holder of the bill of exchange, hundi etc. unless it is
duly paid by the company.
17. Failure to Deliver Share Certificate [Section 113(2)]
In case a company fails to deliver the share certificate
within 3 months of allotment and
within 2 months of application for transfer,
then the company as well as every officer of the
company who is at fault shall be punishable
with fine upto Rs. 5000 per day till such
default continues.
18. Failure to return application money (Section-39)
In the case of issue of share by a company,
• whether to the public or by way of rights
• if, minimum subscription as stated in the prospectus
has not been received
directors shall be personally liable to return the
money with interest, in case application money is
not repaid within a prescribed period.
19. Misrepresentation in prospectus (Section- 34 and
35)
• In case of misrepresentation in a prospectus,
• every director, promoter and every other person
who authorizes such issue of prospectus
• incurs liability towards those who subscribed for
shares on the faith of untrue statement.
20. Fraudulent Conduct (Section 339):
• Where in the case of winding-up of a company
it appears that any business of the company has
been carried on with intent to defraud creditors of
the company or any other person, or for any
fraudulent purpose,
• those who are knowingly parties to such conduct of
business may be made personally liable for all or
any debts or other liabilities of the company.
21. CRIMINAL LIABILITY FOR MISSTATEMENTS IN
PROSPECTUS
• Where a prospectus, issued, circulated or distributed,
includes any statement which is untrue or misleading in
form or context in which it is included or
where any inclusion or omission of any matter is likely
to mislead,
• then every person who authorizes the issue of such
prospectus shall be liable under section 447.
• But this section shall not apply to a person if he proves
that such statement or omission was immaterial or that
he had reasonable grounds to believe that the
statement was true or the inclusion or omission was
necessary.
22. Civil liability for misstatement in prospectus:
where a person has subscribed for securities of a company
acting on any statement included in the prospectus which is
misleading and
the person has sustained any loss or damage as a
consequence thereof,
Then the company and every person who-
is a director of the company at the time of the issue of the
prospectus;
has authorized himself to be named and is named in the
prospectus as a director of the company, or has agreed to
become such director;
is a promoter of the company;
has authorized the issue of the prospectus, and is an expert
(Chartered Accountant etc) referred to section26 (5)
Shall, be liable to pay compensation to every person who has
sustained such loss or damage.
23. Punishment for Fraudulently Inducing Persons to
Invest money:
• any person who, either knowingly or recklessly
• makes any statement, promise or forecast which is
false, deceptive or misleading, or
• deliberately conceals any material facts, to induce
another person to enter into, or to offer to enter
into-
• any agreement for, or with a view to, acquiring,
disposing of subscribing for or under- writing,
securities, or
24. • any agreement, the purpose or the pretend
purpose of which is to secure a profit to any of the
parities from the yield of securities or by reference
to fluctuation in the value of securities; or
• any agreement for, or with a view to, obtaining
credit facilities from any bank or financial
institutions, shall be liable for action under section
447.
25. Investigation of Ownership of Company-
Sec 216 empowers the central government to
appoint one or more inspectors to investigate and
report on matters relating to the company, and its
membership for the purpose of determining the
true persons-
–who are or have been financially interested in the
success or failure of the company; or
–Who are or have been able to control or to
materially influence the policy of the company.
26. Liability for ultra vires acts:
An act, legal in itself, but not authorized by the
object clause of the Memorandum of Association of
a company or statute, is Ultra Vires the company.
Hence, it is null and void.
Directors and other officers of a company will be
personally liable for those acts which they have
done on behalf of a company if the same are ultra
vires the company.
27. • The doctrine of ultra-vires acts evolved in the
case Ashbury Railway Carriage & Iron
Company Ltd v. Hector Riche here a company
entered into a contract for financing
construction of railway lines, and this
operation was not mentioned in the
memorandum. The House of Lords held this
action as ultra-vires and contract, null and
void.
29. FRAUD OR IMPROPER CONDUCT-
The Courts pierce the corporate veil when it is felt that fraud
is or could be committed behind the veil. The Courts will not
allow the Corporate Veil to be used as an engine of fraud.
Gilford Motor Company Ltd v. Horne
Mr. Horne was an ex-employee of The Gilford motor company
and his employment contract provided that he could not
solicit the customers of the company.
In order to defeat this, he incorporated a limited company in
his wife’s name and solicited the customers of the company.
The company brought an action against him.
The Court of appeal was of the view that “the company was
formed as a device, to mask the effective carrying on of
business of Mr. Horne”
it was clear that the main purpose of incorporating the new
company was to perpetrate fraud.
30. PROTECTION OF REVENUE- The Court has the power to
disregard corporate entity if it is used for tax evasion or to
circumvent tax obligations.
Dinshaw Maneckjee Petit, Re;
The assessee was a wealthy man enjoying huge dividend and
interest income.
He formed four private companies and agreed with each to
hold a block of investment as an agent for it.
Income received was credited in the accounts of the company
but the company handed back the amount to him as a loan.
This way he divided his income into four parts in a bid to
reduce his tax liability.
But it was held that, “the company was formed by the
assessee simply as a means of avoiding tax and the company
was nothing more than the assessee himself.
It did no business, but was created simply as a legal entity to
receive the dividends and interests and to hand them over to
the assessee as loans”.
31. ENEMY CHARACTER-
A company may assume an enemy character when persons in
control of its affairs are residents in an enemy country.
In such a case, the Court may examine the character of
persons in real control of the company, and declare the
company to be an enemy company.
Daimler Co.Ltd V. Continental Tyre & Rubber Co.Ltd,
Continental Tyre & Rubber Co.Ltd was incorporated in
England The holders of all shares, except one, and all the
directors were Germans, residing in Germany.
Continental Tyre & Rubber Co.Ltd supplied tyres to Daimler
Co.Ltd in england. Meanwhile First world war started and
Diamler Co. Ltd refused the payment on the ground that
Continental Tyre & Rubber Co.Ltd was an enemy company
Held, the company was an alien company and the payment
of debt to it would amount to trading with the enemy, and
therefore, the company was not allowed to proceed with the
action.
32. • WHERE THE COMPANY IS A SHAM- The Courts also lift the veil
where a company is a mere cloak or sham (hoax).
• The Courts are empowered to lift the corporate veil if they
are of the opinion that such companies are mere cloaks and
their personalities can be ignored in order to identify the real
culprit.
• This principle can be seen in the prior discussed case of
Gilford Motor Co Ltd vs. Horne where it was held that the
newfound company was mere cloak or sham, for purpose of
enabling Horne to commit breach of his agreement of not
solicitating clients of his ex employer.
33. If trying to avoid a Legal Obligation.
Sometimes the members of a company create another
company to avoid certain legal obligations. In such cases,
piercing the corporate veil allows the Courts to understand
the real transactions.
Eg. a company had an agreement with employees to share 20
percent of its profits with its employees as a bonus. To avoid
this, the company opens another company and transfers its
investment to it.
The new company formed has no assets of its own and no
business income either.
By doing so, the principal company reduced the amount of
bonus liable to be paid to its employees. The Courts, by
piercing the corporate veil, can understand the real intention
of the principal company and ensure that it fulfils its legal
obligations
34. AGENCY OR TRUST- Where a company is acting as agent
for its shareholder, the shareholders will be liable for
the acts of the company.
F.G.Films ltd, An American company gave loan to a
British company for financing the production of a film
in India
The president of the American company held 90 per
cent of the capital of the British company.
The Board of trade of Great Britain refused to register
the film as a British film.
Held, the decision was valid in view of the fact that
British company acted merely as the nominee of the
American Company.
35. AVOIDANCE OF WELFARE LEGISLATION-
Avoidance of welfare legislation is as common as
avoidance of taxation and
the approach of the Courts in considering problems
arising out of such avoidance is generally the same
as avoidance of taxation.
It is the duty of the Courts in every case where
welfare legislation is being avoided to get behind
the smokescreen and discover the true state of
affairs.
36. Workmen of Associated Rubber Industry ltd., v. Associated
Rubber Industry Ltd
“A Limited” purchased shares of “B Limited”.
The dividend in respect of these shares was shown in the P&L
account of the company, year after year and was taken into
account for the purpose of calculating the bonus payable to
workmen of the company.
Sometime later the company transferred the shares of B
Limited, to C Limited a subsidiary, wholly owned by it.
Thus, the dividend income did not find place in the Profit &
Loss Account of A Ltd., with the result that the surplus
available for the purpose for payment of bonus to the
workmen got reduced.
Here a company created a subsidiary and transferred its
investment to it, in a bid to reduce its liability to pay bonus to
its workers. Thus, the Supreme Court brushed aside the
separate existence of the subsidiary company.
38. To protect public policy and prevent transactions
contrary to public policy.
Where the conduct of the company is in conflict
with public interest or public policies, Courts are
empowered to lift the veil and hold such persons
liable who are guilty of the act.
Protecting public policy is a just ground for lifting
the corporate veil.
39. Section 239– Power of inspector to investigate affairs of
another company in same group or management: It provides
that if it is necessary for the satisfactory completion of the
task of an inspector appointed to investigate the affairs of the
company for the alleged mismanagement, or oppressive
policy towards its members, he may investigate into the
affairs of another related company in the same management
or group.
Section 275- Subject to the provisions of Section 278, this
section provides that no person can be a director of more
than 15 companies at a time. Section 279 provides for a
punishment with fine which may extend to Rs. 50,000 in
respect of each of those companies after the first twenty.
40. Section 299- This Section gives effect to the following
recommendation of the Company Law Committee: “It is
necessary to provide that the general notice which a director
is entitled to give to the company of his interest in a particular
company or firm under the proviso to sub-section (1) of
section 91-A should be given at a meeting of the directors or
take reasonable steps to secure that it is brought up and read
at the next meeting of the Board after it is given. The section
applies to all public as well as private companies. Failure to
comply with the requirements of this Section will cause
vacation of the office of the Director and will also subject him
to penalty under sub-section (4).
Sections 307 and 308- Section 307 applies to every director
and every deemed director. Not only the name, description
and amount of shareholding of each of the persons
mentioned but also the nature and extent of interest or right
in or over any shares or debentures of such person must be
shown in the register of shareholders.
41. Section 314- The object of this section is to prohibit a director
and anyone connected with him, holding any employment
carrying remuneration of as such sum as prescribed or more
under the company unless the company approves of it by a
special resolution.
Section 542- Fraudulent conduct: If in the course of the
winding up of the company, it appears that any business of
the company has been carried on with intent to defraud the
creditors of the company or any other person or for any
fraudulent purpose, the persons who were knowingly parties
to the carrying on of the business, in the manner aforesaid,
shall be personally responsible, without any limitation of
liability for all or any of the debts or other liabilities of the
company, as the court may direct. In Popular Bank Ltd., In re it
was held that section 542 appears to make the directors liable
in disregard of principles of limited liability. It leaves the Court
with discretion to make a declaration of liability, in relation to
‘all or any of the debts or other liabilities of the company’.
This section postulates a nexus between fraudulent reading or
purpose and liability of persons concerned.
42. JUDICIAL INTERPRETATIONS
By contrast with the limited and careful statutory directions
to ‘lift the veil’ judicial inroads into the principle of separate
personality are more numerous. Besides statutory provisions
for lifting the corporate veil, courts also do lift the corporate
veil to see the real state of affairs. Some cases where the
courts did lift the veil are as follows:
United States v. Milwaukee Refrigerator Transit Company–
In this case, the U.S. Supreme Court held that “where the
notion of legal entity is used to defeat public convenience,
justify wrong, protect fraud or defend crime, the law will
disregard the corporate entity and treat it as an association of
persons.”
Some of the earliest instances where the English and Indian
Courts disregarded the principle established in Salomon’s
case are:
43. Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great
Britain) Ltd– This is an instance of determination of the
enemy character of a company. In this case, there was a
German company. It set up a subsidiary company in Britain
and entered into a contract with Continental Tyre and
Rubber Co. (Great Britain) Ltd. for the supply of tyres.
During the time of war, the British company refused to pay
as trading with an alien company is prohibited during that
time. To find out whether the company was a German or a
British company, the Court lifted the veil and found out that
since the decision making bodies, the board of directors
and the general body of share holders were controlled by
Germans, the company was a German company and not a
British company and hence it was an enemy company.
44. Gilford Motor Co. v. Horne– This is an instance for prevention
of façade or sham. In this case, an employee entered into an
agreement that after his employment is terminated he shall
not enter into a competing business or he should not solicit
their customers by setting up his own business. After the
defendant’s service was terminated, he set up a company of
the same business.
45. As a result, there are two main ways through which a
company becomes liable in law:
firstly through direct liability (for direct infringement) and
secondly through secondary liability (for acts of its human
agents acting in the course of their employment).
There are two existing theories for the lifting of the
corporate veil.
The first is the “alter-ego” or other self theory, and the
other is the “instrumentality” theory.
The alter-ego theory considers if there is in distinctive
nature of the boundaries between the corporation and its
shareholders.
The instrumentality theory on the other hand examines the
use of a corporation by its owners in ways that benefit the
owner rather than the corporation.
It is up to the court to decide on which theory to apply or
make a combination of the two doctrines.
46. • The doctrine of the lifting the veil of corporate personality is a doctrine
that advocates going behind and looking behind the juristic or corporate
personality of a body corporate.
• In exceptional cases, that veil of corporate personality can be lifted; and
looking behind the veil, one could see the corporate personality fading
away.
• Courts have lifted the veil, with the objective of preventing fraud. In such
cases the members of the corporation are considered as persons working
for the corporation.
• In England, the problem was faced soon after War. The court may lift the
veil of personality for a number of reasons- Firstly- it may be done to
ascertain whether a company is to be treated as an “Enemy Company” in
times of War.
• During the First World War in Dalmer Co. Ltd. V Continental Tyre &
Rubber Co. ( Great Britain) Ltd., a company which was registered in
England and which should normally be treated as
47. • an English Company was nevertheless held by
the House of Lords to be an enemy company
because, all its directors and its shareholders
except one were Germans. This is, however,
not a departure from the general rule that a
company is distinct from its members, it only
shows that its character whether friendly or
enemy is to be ascertained by looking behind
the veil.
48. The Income Tax Act, 1961
Under the income tax act, there are some section where the principal
of lifting of the corporate veil is applied.
Section 178 applies to a company in liquidation. The liquidator of
any company shall be personally liable for tax due from the
company and remaining unpaid if he has failed to give notice to
the income tax officer having jurisdiction to assesses the company
of the fact of his appointment as liquidator of the company within
30 days of his becoming such liquidator or fails to set aside
amounts equal to the amounts notifies to him by the income tax
officer. The Income Tax officer’s notice notifying the amount to be
set apart by the liquidator has to issue within three months of
receipt by the income tax officer of the intimation of appointment
of the liquidator. The liquidator personal liability is limited to the
amount notified by the Income Tax officer under section 178 (2) if
so notified. This is strictly not a case of lifting the corporate veil
but one where for non- compliance with certain provisions in the
49. I.T. Act, the liquidator is personally held liable for the
tax obligations of the company in
liquidation. Sec- 179 (1) of the Income Tax Act is the
one provision which fit in well with the concept of
a 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 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
50. the affairs of the company. This is a negative
provision throwing the onus on the director to
prove his non- culpability.
According to section 278, where an offence under
the income Tax has been committed by a
company, not only the company, but also every
person who, at the time of commission of the
offence was incharged of and responsible to the
company for the conduct of its business will also
be personally liable deeming him to be guilty of
such offence unless he proves that the offence
was committed without his knowledge or
could not be prevented in spite of all due
diligence exercised by him. This does not involve
the principle of lifting the corporate veil as
personal guilt of the individuals is itself proved.
51. Foreign Exchange Regulation Act,
1973:
Sec- 63 of this Act deems guilty for contravention of the
provisions of the Act, every person in charge of and
responsible to the company for its affairs.
JUDICIAL APPROACH
The theory of piercing the corporate veil cannot be ignored in
the circumstances where in fraud, oppression and
misconduct, etc is required to be detected by the court.
These are the situations when the court will lift the
corporate veil of the company with the view to examine the
actual persons who stand behind the corporate mask. The
doctrine of lifting the veil is a device which is developed to
avoid the hardships of the doctrine of corporate
personality.
52. The corporate veil is said to be lifted when the court
ignores the company and concerns itself directly
with the members or managers. In Union of India
and others v. Play world electronics private limited
and another the Supreme Court held that the
legislature cannot be expected to enumerate each
and every device which may be used by the
members of the company to evade tax etc. It is at
the discretion of the Court whether to lift the
corporate veil of the corporation or not, because it
depends on the different situations, but in some
circumstances it is highly desirable for the Court to
lift the corporate veil. There are various situations
in which the judiciary has used this doctrine.
53. Evasion of Tax:
The corporate device is often used as a means of avoiding forms of
tax. It is very difficult for the legislature to plug all the gaps in the
law and thus the judiciary has to stop it. The Courts very often
resort to lifting of the veil in order to find out the true intent of the
company.
Bacha F. Guzdar v. Commissioner of Income tax, Bombay, In this
case, the agricultural income was exempt from tax under the
income tax Act. The income of a tea company was exempt to the
extent of 60% as agricultural income and 40% was taxed as income
from manufacture and sale of tea. The plaintiff, a member of the
tea company received certain amount as dividend in respect of
shares held by her in the company. She claimed that 60% of her
dividend income should be exempt from the income tax being an
agricultural income. The Supreme Court rejected the argument of
the plaintiff and held that although the income in the hands of the
company was partly agricultural, yet the same income when
received by the shareholders as dividend could not be regarded as
agricultural income. .
54. CIT v. Associate Clothiers Ltd. in this case a company was
incorporated by certain assess who held all its shares.
Thereafter the assess sold certain premises to the
company. The question arose whether the difference
between the selling price and the cost of the property
should be regarded as the profits received by the
assesses and therefore, taxable income because the
transfer of the premises by the assesses was merely a
transfer from self to self and it was not a commercial
sale from person to another person, but the contention
of the assesses was rejected by the Court on the
ground that a company after incorporation becomes a
legal person district from its shareholders and thus the
sale of the premises by the assesses to the company
should be regarded as a sale from one entity to
another entity and the difference between the selling
price and the cost of the property should be treated as
the taxable income in the hands of the assesses.
55. Fraud or Improper Conduct:
Where the medium of a company has been used for committing
fraud and improper conduct, courts have lifted the veil and
looked at the realities of the situation.. In Delhi Development
Authority v. Skipper Construction Company Pvt Ltd. the DDA
ad entered into a contract for construction on a piece of land.
After prolonged delays and problems, the DDA had to finally
order the construction company to stop the construction and
hand over the land to DDA. The company inspite of a Court
order to this effect, had already collected various monies
from parties, agreeing to sell the space and had infact, sold
the same space to more than one party in the situations. The
Supreme Court stated that this was a fit case for lifting of the
corporate veil and the veil must be lifted when the device of
incorporation is being used for some illegal or improper
purpose. The Court thus found the individual members
behind the corporate body liable for the acts that they
attempts to carry on through the guise of the company.
56. Avoidance of Welfare Legislation:
Where it was found that the sole purpose for the
formation of the new company was to use it as a
device to reduce the amount to be paid by way of
bonus to workmen, the supreme court uphold the
piercing of the veil to look at the retranslation.
In Cases of Economic Offences:
In Santanu Ray v. Union of India, it was held that in
case of economic offences a Court is entitled to lift
the veil of corporate entity and pay regard to the
economic realities behind the legal facade.
57. In this case, it is alleged that the company had
violated section 11(a) of the central excises and salt
act, 1944. The Court held that the veil of corporate
entity could be lifted by adjudicating authorities so
as to determine as to which of the directors was
concerned with the evasion of the excise duty by
reason of fraud, concealment or willful mis-
statement or suppression of facts or contravention
of the provisions of the act and the rules made
there under.
58. AGENCY
According to this classification, the Courts
examine whether or not the company is acting
as an agent of some of its shareholders or
other members of the company. In such a
situations the veil may be lifted to make these
persons liable for the companies acts.
59. In Smith Stone and knight v. Birmingham Corporation, a
company required a partnership concern and registered it as
a company and continued to carry on the acquired business
as subsidiary company. The parent company held all the
shares except five which were held in trust for the company
by its directors. When the Birmingham corporation
compulsorily acquired the premises for the subsidiary, the
parent plaintiff corporation claimed compensation. The
contention for the respondent, however was that the proper
party for claiming compensation was the subsidiary and not
the parent corporation as they were two separate legal
entities. The Court held that the subsidiary company was
nothing more than an agent of the parent company, and
therefore all the acts of the subsidiary were attributable to
the parent company. The subsidiary, not operating in its own
behalf but on that to the parent was sufficient reason for the
parent to claim compensation on behalf of the subsidiary.
Thus though the separate legal entity of the subsidiary was
recognised. The agency principle was applied to identify the
parent company as the principle and the subsidiary as its.
60. Conclusion : The study finds that, this device merely seeks to
strike a balance between the interest of the public and the
concept of a separate personality. Thus the device is
essentially used as a flexible tool to ensure justice. It would
be defeat the object of the device if it were to be applied
rigidly with no scope at all left for judicial discretion. There
can be no single unifying principle that underlines the
decisions of the Courts. Although on ad hoc explanation may
be offered by a Court which so decides, there is no principle
approach to be derived from the authorities. Thus it is not
possible to evolve a rational, consistent and inflexible
principle which can be invoked in determining the question as
to whether the veil of corporation should be lifted or not.
Courts and Legislature must adopt a single set of statutory
standards as to when limited liability should be disregarded.
This will provide the certainty in this area of law and will
allow uniformity, applying the doctrine of lifting the corporate
veil.
61. Concept of limited liability:
One of the main motives for forming a corporation
or company is the limited liability that it offers to
its shareholders.
By this doctrine, a shareholder can only lose what
he or she has contributed as shares to the
corporate entity and nothing more.
This concept is in serious conflict with the doctrine
of lifting the veil as both these do not co-exist.
