One of the most significant principles in company law is the idea that a company has a separate legal personality from its members. This concept protects shareholders and directors from being personally liable for the company’s debts, a concept commonly known as the corporate veil.
However, this protection is not absolute. In certain cases of fraud, misrepresentation, or misuse of the corporate structure, courts may “lift” or “pierce” the corporate veil to hold the real individuals behind the company personally accountable.
This blog explains the meaning of the corporate veil, why it exists, situations where it is lifted, and landmark cases in India and abroad.
Introduction
The company, as a business structure, has two defining advantages: limited liability and a separate legal entity. This means creditors cannot go after the personal wealth of shareholders or directors if the company incurs debt.
But what if individuals hide behind the company structure to commit fraud, evade taxes, or act against public interest? That’s where the principle of lifting the corporate veil comes into play. It prevents misuse of the company form and ensures justice is not defeated by technicalities.
What is the Corporate Veil?
The corporate veil refers to the metaphorical shield between the company and its members (shareholders and directors).
- It protects individuals from personal liability.
- It maintains the company’s status as a separate legal person.
Example – If a company borrows Rs 1 crore and defaults, creditors can recover only from the company’s assets, not directly from shareholders’ personal assets.
Judgments on the Character of the Corporate Veil
The origins of this principle were established in the seminal UK case Salomon v. Salomon & Co. Ltd. (1897) in which the House of Lords determined that upon incorporation, a company is a separate person and distinct from its shareholders.
The Indian courts have taken a similar approach; they have embraced the idea that a company possesses its own legal personality.
Circumstances Under Which the Corporate Veil May Be Lifted
Courts may disregard corporate identity and look behind the company in the following situations:
1. Fraud or Impropriety
If the company acts in a manner that involves fraud or otherwise acts improperly, the court may be willing to hold directors/shareholders personally liable for that responsible corporate use.
- Case: Delhi Development Authority v. Skipper Construction (1996) — The Supreme Court lifted the veil where the corporation was used to defraud home buyers.
2. Tax Evasion
Where there is some tax avoidance by using a corporation, the veil can be lifted.
- Case: CIT v. Sri Meenakshi Mills Ltd. (1967) — The court found tax avoidance and pierced the veil.
3. Enemy Character
During a time of declared war, corporations can be treated as enemy agents acting on behalf of their enemy principals.
- Case: Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (1916) — Where most shareholders were German nationals, the corporation was treated as an enemy.
4. To Determine Beneficial Ownership or Exercises of Control
The veil may also be lifted and ignored to find out about who controls the company, or who the real owners are. This is a situation that often arises in the context of a company, and may involve the holding-subsidiary approach of group companies, especially in transactions between companies.
5. Public Interest
Separate entity status can be overlooked when the public interest requires it.
- For instance, in the area of environmental violations or large-scale consumer fraud.
6. Misuse of Subsidiaries
Parent companies sometimes use subsidiaries to escape liabilities. Courts can pierce the veil to fix accountability.
Statutory Provisions for Lifting the Corporate Veil
Apart from judicial rulings, the Companies Act, 2013, also contains provisions where the corporate veil may be lifted –
- Section 7(7): Punishment for furnishing false information at the time of incorporation.
- Section 34 & 35: Mis-statements in prospectus make directors/officers personally liable.
- Section 39 & 40: Improper allotment of shares and default in complying with listing conditions.
- Section 339: Personal liability for fraudulent conduct of business during winding up.
Landmark Indian Cases on Corporate Veil
- Life Insurance Corporation v. Escorts Ltd. (1986): SC held that lifting of the veil is not routine; it is an exception and must be applied only when justified.
- Union of India v. Reliance Industries (2018): Courts lifted the veil to examine the real beneficiary in a gas dispute.
- Vodafone International Holdings v. Union of India (2012): SC refused to lift the veil as the transaction was genuine and not designed for tax evasion.
Arguments for the Corporate Veil
- Fosters entrepreneurship and limits risk.
- Encourages investment and growth in business.
- Provides certainty, as companies do not dissolve with a change in membership.
Arguments Against Absolute Protection
- It can facilitate fraud, tax avoidance, and unjust enrichment.
- Offers unscrupulous directors protection under limited liability.
- It may delay justice if courts are reluctant to pierce the veil.
Conclusion
The corporate veil is one of the main elements of company law. It allows a company to be treated as a separate legal entity from the corporate owners. The corporate veil provides limited liability and encourages investment in shares. But the privilege of limited liability can’t be exercised at a whim. The courts and statutes provide many clear causes of action to pierce the veil of corporate structure whenever this structure has been abused to facilitate fraud, evade tax responsibilities, or endanger the public interest.
In practice, the corporate veil is a seesaw; it is respected to facilitate business prosperity and, in many instances, disregarded in favour of ensuring justice or fairness or to protect the public interest. For anyone venturing into a company or limited liability structure, it is vital to be aware of this principle, as it outlines the power of corporate structural protection as well as its limitations.
Reference
The Companies Act, 2013 (Act No. 18 of 2013)
https://www.mca.gov.in/
https://www.icsi.edu/home/
