The document discusses the alter ego doctrine, which allows courts to pierce the corporate veil and hold shareholders or directors personally liable for corporate actions. Some key points: - The alter ego doctrine treats a corporation and its shareholders/directors as indistinguishable when the corporation is used for improper purposes like fraud. - Courts consider factors like inadequate capitalization, personal use of corporate funds, and overlapping ownership/control to determine if the alter ego doctrine applies. - Indian courts have applied the alter ego doctrine in criminal cases, finding corporations can be prosecuted through the actions of directors as the "directing mind." However, liability only flows from individuals to the corporation, not vice versa.

1. SUJATA KUMARI MUNI

2. • For many generations the corporation has been the
key feature of our enterprise system. The law has
encouraged many innovations like the doctrine of
piercing corporate veil to treat the corporation as a
distinct entity and separate from its owners.
• Justice Benjamin Cardozo (1926) held in Berkey v.
Third Avenue Railway Company, “whenever anyone
uses control of the corporation to further his own
rather than corporation’s business, he will be liable
for the corporation’s acts’ upon the principle of
respondent superior applicable even where the agent
is a natural person”. It is a classic veil piercing case.
PRELIMINARY
REMARKS

3. THE ALTER EGO DOCTRINE
This doctrine has been developed principally by the California Courts [Associated Vendors
Inc vs. Oakland Meat Packaging Co. (1962)]which is now widely used across the world. The
alter ego doctrine is conceptually no different from the doctrine of piercing the corporate veil
or tearing the juristic veil.
The doctrine of Alter Ego is a judicial doctrine/ legal principle.
The courts apply alter ego rule to ignore the corporate status of a group of shareholders,
officers and directors of the corporation with respect to their limited liability.
The academicians and practitioners find it very difficult to know the basis in which the courts
may be justified to lift the corporate veil. This is one area where the facts of the case and the
personal views of the judges have an important bearing on the outcome.

4. Contd…
A corporation is considered as the alter ego of its shareholders, directors, or officers when any
transaction of personal business is carried out by them in the name of the corporation. If the
business (corporation ) is being dominated and abused by the owner for personal purposes, each
will be deemed the alter ego of the other.
They are granted immunity from individual liability for any act carried out for business purposes
but not for personal purposes.
Under this rule, a corporate veil of an individual is lifted and makes him/her personally liable for
his/her unjustifiable activities.

5. Contd…
A parent corporation is the alter ego of the subsidiary when it exercises excessive control over the
subsidiary which is sometimes said to have “no mind”, “no will” or “no separate existence”.
The alter ego doctrine is also known as the instrumentality rule because the corporation
becomes an instrument for the personal advantage of its parent corporation, stockholders,
directors, or officers. In such case, the court may conclude that the corporation is the owner’s
alter ego, that neither the corporation nor the business owner has a separate personality, and
may hold the owner responsible for the acts and debts of the corporation.

6. Application of the principle
This doctrine applies to limited liability companies as well as traditional corporation but it is
necessary to plead or prove fraud in order to invoke the ‘piercing the corporate veil doctrine’
under the Alter ego theory.
Usually the Courts respect the corporate structure of limited liability unless there is some
good reasons to pierce the veil of the corporation in the interest of justice and equity.
Certain compelling circumstances and material on record must exist before the court for
invoking the doctrine of alter ego. Further this doctrine is required to be incorporated as a
statutory provision for regulating the behaviour of the corporation.

7. Test to determine whether a corporate presence is an alter ego or not
The alter ego doctrine is a case-specific analysis that is “equitable in nature” and dependent
on the “attendant facts and equities.”No one factor is dispositive. The following factors are
relied upon to consider the presence of alter ego:
• The issuance of stock
• Election of director
• Inadequate capitalisation
• Whether funds are taken out of the corporation for personal use instead of corporate purposes
• Overlapping of ownership, officers
• Common office space
• Address and telephone numbers of the corporate entities
• The amount of business discretion displayed by the alleged dominated corporation
• Whether the related corporation deals with the dominated corporation at arm’s-length
• Whether the dominating corporation in question uses the property owned by the dominated corporation as if it were
its own.
The presence of these factors or some of these factors support a finding of alter ego status.
When the Court finds that a business entity and its owner alter egos it concludes that they
have a single personality and it becomes a case of blatant disregard to the corporate form.

8. • The alter ego doctrine is essentially an equitable device used by the
courts to prevent abuses by those improperly using the legal shield
provided by law to a corporate entity.
• Since the corporation has no mind of its own than a body of its own; its
active and directing will must consequently be sought in the person
who is really the directing mind and will of the corporation.
• The directing mind is the pre – requisite for the operation of this
doctrine. Here the directing minds completely ceases to act in the
interest of the corporation.
• Directors and other persons who have control over the management of
affairs of the company can be held liable for the acts committed by or on
behalf of the company under the doctrine of alter ego. In other words
the identity of the directing mind and the identity of the company
coincide – the actor – employee who physically commits the offence is
the ego of the corporation.
• But, it has been held that the principle of alter ego has always been
applied in reverse, so the acts of the individuals, who is in the control of
the affairs of the company are attributed to the company and not vice
versa.
Liability
of
Directors
Under
Alter Ego
Doctrine-

9. Application of the Doctrine by Indian Courts
Standard Chartered Bank and Others V. Directorate of Enforcement and Others(1999).
• In the present case the main issue for consideration was – Whether a company or a corporate body could be prosecuted for offences for which the
sentence of imprisonment is a mandatory punishment?
• The contention of the appellant was, a corporation being a juristic person cannot be awarded the punishment of imprisonment. when a statutory
provision cannot be complied with as per its strict language, the consequence should be that there can be no prosecution.
• The Supreme Court held that,
• Section 11 of the Indian Penal Code in which the “person” is defined as: “The word “person” includes any Company or Association or body of persons,
whether incorporated or not.
• The Court further stated that the statutes are interpreted with respect to legislative intent and not just on the basis of strict construction.
• In the absence of the possibility of criminal liability, corporations would escape moral conviction for wrongdoing.
• Thus, after this case the current position is that that corporations can no longer claim immunity from criminal prosecution on the grounds that they
are incapable of possessing the necessary mens rea for the commission of criminal offences. The notion that a corporation cannot be held liable for the
commission of a crime had been rejected.
• Hence, a company is liable to be prosecuted for the criminal offence although the act may have been committed through its agent.
Sunil Bharti Mittal V CBI & Ors.
• The special judge while applying this doctrine observed that the managing directors and directors can be considered alter ego of the companies and the
acts of the companies are to be attributed and imputed to them. The Special Judge held that in light of the capacity in which these directors acted, they
can be considered as the persons controlling the affairs of the company and the directing mind and will of the respective companies.
• The order passed by the Special Judge was challenged before the apex court. The apex court observed that the principle of alter ego can only be applied
in one direction that is to make the company liable for an act committed by a person or group of persons who control the affairs of the company as they
represent the alter ego of the company and not vice versa.