Perceived from a legal lens, a company holds the distinction of being a legal
person existing independent of its constituting members (based on Principal of
separate legal entity which was a general principal developed in European
law). The Principal holds that a company "is an independent person with its
rights and liabilities".
Such distinction in the eyes of corporate law would
mean that a company possesses the capacity to sue or be sued, own property under
its name, gain perpetual succession and transferable shares. This legal fiction
was created to promoted business and has brought a lot of commercial prosperity
in the country. However, such rights can only be enjoyed in the absence of
malpractice and abuse of provision under the corporate personality.
corporate veil can be pierced or lifted through judicial pronouncements and
statutory provisions in the event of devious and deceitful behaviour. This
research paper seeks to elaborate on the corporate veil, bring forth
intercomparison between India and other countries, and discuss recent
development in lifting the corporate veil in matters of arbitration and
A myriad of case laws over the years have established and developed this
principal. The landmark decision was made in the year 1897, in the case
of Salomon V, Salomon & Co. Ltd. Salomon a sole proprietor sold his
manufacturing business to a limited liability company that he had himself
The House of Lords held the company to not be a sham, and that the
debts of the company lied with the company itself and not Mr. Salomon.
Similarly, in the case of Kondoli Tea Co. Ltd.
 a group of people transferred
a tea estate to a company (of which they themselves were the constituent
members) and wanted exemption from ad valorem duty. They were of the opinion
that it was just a transfer from them under one entity to themselves under
The Court however held that:
The Company was a separate person;
a separate body altogether from the shareholders and the transfer was as much a
conveyance, a transfer of property, as if the shareholders were totally
different persons from the Company".
In Macaura v. Northern Assurance Co.
 the court has also opined that a number would not have an insurable
interest in a company.
It is important to understand that limitations as well, have been developed when
recognising a separate legal entity to prevent fraud and deceitful gain.
"Incorporation does not fully cast a veil over the personality of a limited
company through which the courts cannot see. The courts can, and often do, pull
off the mask. They look to see what really lies behind. A corporation will be
looked upon as a legal entity as a general rule but when the notion of legal
entity is used to defeat public convenience, justify wrong, protect fraud or
defend crime the law will regard the corporation as an association of
A company is not to be understood to be similar to another independent person.
It is well understood that a company due to the lack of Mans Rea is incapable of
committing a Tort or a crime. In invent of malignant transaction the association
of people behind the company are indicted. The court under these circumstances
will look into the intention of the directors, promoters and shareholders.
Blanket recognition of this principal would let people hide behind the garb of
the corporate veil and lead to injustice to the parties involved with the
company. Such a statutory privilege can only be used to nourish a legitimate
business. There are two methods of piercing the corporate veil: through
statutory provisions and by judicial pronouncement.
There are provisions present in The Companies Act, 2013 such as section 7(7)
which punishes incorporating a company under false information: section 251(1)
adds liability on fraudulent application for striking off the name of a company
from register of companies: section 34 puts criminal liabilities for
misstatements present in the prospectus: section 35 deals with civil liabilities
for misstatements present in the prospectus: section 216 entails investigation
into the ownership of a company:
section 12(8) penalise non-compliance of
required formalities in registering a company: section 248 deals with
deregistration of a company by the registrar from the register of companies:
Section 339 puts liabilities on fraudulent business transactions during the
winding up of a company: section 464 penalises non-compliance of requirements of
incorporation: section 73 and 76 attach prohibition on acceptance of deposits
from public and acceptance of deposits from public by certain
 Liability is also imposed on acts outside the perimeters of the
scope of the Objective Clause in the memorandum as held in Weeks v. Propert
Judicial pronouncements are another mechanism to impose liability on the
associations of people behind the corporate veil. Under its ambit we shall cover
protecting revenue, fraud, determination of enemy character, sham companies,
avoiding welfare legislations, contempt of court, agency of a holding company,
actions against public policy, single economic unit, activities that were
negligent and imposing criminal liability.
For determination of enemy character let us look at the case of Diamler Company
Ltd. v. Continental tyre & Rubber Co
. A trade debt was dismissed as payment
of the debt would infer trading with an enemy company.
In matters of Fraud
The Courts have pierced the corporate veil in matters of duping grieved parties
as established in the case of Gilford Motors Company Ltd. v. Horne
For Protection of Revenue
A company cannot simply be created and used for avoiding taxation as held in Sir
Dinshaw Maneckjee Petit.
In Regards to Welfare Legislation
Avoidance of welfare legislation is as common as avoidance of taxation of
workmen Employed in Associated Rubber Industry Ltd. V. Associated Rubber
 The New Company in this case was created in an attempt to
reduce the bonus to be given to workers out of the profits of the holding
company under the Payment of Bonus Act, 1965.
When to hold in Contempt of Court
Jyoti Ltd. v. Kanwaljit Kaur Bhasin
 the court has opined that the corporate
veil can be pierced when punishing for contempt of Court. However, it such
exceptions to lifting the corporate veil are very few and in the case of U.K
Mehra v. Union of India
A Shame Company
An example of a sham company is brought to light with the case of Delhi
Development Authority v. Skipper Construction Company (P) Ltd
. Wherein the
Supreme Court opined that corporate bodies formed by the director and members of
his family were simply done to commit fraud and deceit people.
Matters of public Policy
To prevent injustice in matters of public policy the courts may lift the
corporate veil. Yet due to the wide amplitude of the term public policy there
are no specific grounds to act on and the courts look into the substance of the
matter. Furthermore, it is well understood that a rule cannot be greater than
the exception and same is the case when it comes to the principle of separate
legal entity and such application can be seen PNB finance Ltd. V. Shital Prasad
Principal: Agent Relationship
The landmark case on the grounds of agency of a holding company was brought into
light is Smith Stone & Knight Ltd. V. Birmingham Corporation
. There can be a
principal agent relation between a holding company and its subsidiary. The Court
laid down five tests for when to lift the corporate veil and recognise such a
It was further understood that establishing the agent- principal relationship is
slightly more complicated for using to lift the corporate veil. In the case
of Royal Industries Ltd. V. Kraft Foods, Inc
 , The courts said to be
vigilant in the matters of agency when lifting the corporate veil.
Under circumstance where there is a duty of care and there has been a breach of
such duty the courts may also lift the corporate veil. In the case of Chandler v
Cape Plc. The holding company in this case was held liable to for the
negligent act of its subsidiary. The breach of duty of care was established in
matters relating to health and safety of the employees of the subsidiary.
There have also been cases of imposing criminal liability on companies. As early
on as in the year 1897 of the court in Shri Ambica Mills Ltd. held that for
criminal acts or fraud by the members of a company the corporate veil can be
lifted and emphasis would be on the subject matter of the cases. Even recently,
(year 2012) the court imposed criminal liability in the case Vodafone
International Holding B.V v. Union of India & Anr for misuse of the
principal of separate legal entity structure to evade taxes.
It is also
important to note observations made in the case VTB Capital v.
Nutritek where the court said that lifting of the corporate veil does not
ignore the existence of the subsidiary company but only allows to create a
remedy against the Controller (parent company) that would otherwise not be
available. Secondly it is not necessary that the corporate veil will be lifted
when other remedies are not available.
Hence, we can understand that criminal
liability can be imposed even when the case can be resolved under administrative
or civil matters. In fact a parent company can also be held vicariously liable
for criminal indictment of its subsidiary. Such can be understood from the
infamous Bhopal Gas tragedy.
Holding the Parent company liable was deemed to
be an effective remedy in the occasion of such harm. Justice seth, further held
that in the event of a natural disaster of such a scale the of the subsidiaries
would be insufficient to provide compensation to the victims therefore the
corporate veil can be lifted on the equitable grounds as well.
Comparative Analysis of The U.S,. India & The U.K
In the case of the U.K and the U.S, the lifting of the corporate veil is heavily
based on facts and circumstance of the case alongside clear
It can be understood that in the US the courts put emphasis on the intention and
fraudulent conduct of the impugned party to prevent injustice as in the case
of Anderson v. Kennebec River Pulp & Paper Co
. Equity estoppels theory has
also been applied in a myriad of cases to lifted the corporate veil. Once such
case is the case of United State v. Refrigerator Transit Company
. There are
empirical studies that show that the plaintiff is granted relief in 40% of the
cases that were reported. Lifting the Corporate veil is ''the most
litigated issue in corporate law in the United States''. The most forefront
theories in the US lad emphasis on the ''alter ego''.
Summarising, three basic prongs can be seen in the US:
- Unity of interest and ownership the separate personalities of the
shareholder and corporate cease to exist
- Wrongful conduct wrongful action taken by the corporation, and
- Proximate cause: as a reasonably foreseeable result of the wrongful
action, harm was caused to the party that is seeking to pierce the corporate
The law on separate legal entity as understood from their case laws seems to be
similarly constructed as they are in the US. In the case of Creasy v. Breachwood
. The British Court in a similar fashion to the America
case Anderson V. Kennebec
 pierced the corporate veil in pursuit of promoting
justice for the plaintiff.
The courts of both countries use similar terms
such as "alter ego" (used by us courts in the case Adams v. Cape Industries
plc.and by the UK Courts in the case of Security Exchange Ltd. V. Gordon,
Transcript of Hearing.
) On an inter-comparison between the US and the UK it
was found that U.S. courts seem to show more resistance when lifting the
corporate veil (more so in the case of corporate shareholder).
A comparison of India law and The UK elucidates that most of our provisions our
borrowed from the common law in England. The case of Salmon v Salmon has
been the binding authority even in India Courts. However India law also has
statutory provision in the Companies Act, 2013 as mentioned certain cases where
there is written law on lifting the corporate veil alongside judicial
Whether an Arbitral Tribunal can lift the Corporate Veil:
The landmark judgment on arbitration is Booz Allen and Hamilton Inc. V. SBI Home
Finance Limited and Ors
. The Court held that all those matters that could be delt with in a civil or commercial court can be decided via arbitration unless
expressly or necessarily barred. Matters of public policy were expressly barred
by the courts and for matters necessary by implication the test of right in
rem v. Right in persona was laid down".
However, The examples given in para 36 of the judgement was not an exhaustive
list of non-arbitrable disputes. Later on the Supreme Court in A. Ayyasamy
v. A Paramasivam and Ors
 Further brought forward a list of
non-arbitrable dispute. This list was also general and non- exhaustive in
nature. Ergo, it can be understood that the Jurisprudence on what is non-
arbitrable is still developing. With a preliminary understanding of arbitrable
disputes we can now delve into the two judgments on whether the corporate veil
can be lifted in arbitrable disputes.
Two relevant judgments are Sudhir Gopi v. IGNOU
 (can lift the corporate
veil and hold the person behind the company as an alter ego) and the case
of GMR Energy Ltd. v. Doosan Power Systems India Pvt. Ltd
. (held that the
corporate veil cannot be lifter as the criteria of alter ego is not in the list
of non- arbitrable disputes).
Both judgments answer the question in hand differently and both were delivered
by a single judge, creating confusion as to whether the corporate veil can be
lifted. But since the GMR energy case came after Sudhir Gopti case one can
surmise that the GMR energy case might not hold good in law as it opposes a
judgment of single judge bench.
This is an interesting question in the hands of our legal community and future
development waits. However, it is my personal opinion that the Sudhir Gopi case
will hold Good in the eyes of law as the purpose behind piercing the corporate
veil is to prevent fraud and deceitful behaviour.
If the intentions are on these
lines, then simply absence of recognition in the non-arbitrable list should not
carry water as then it would defeat the purpose of such an exception. In
consonance, the criteria of alter ego might just be included in this list via
later developments as it is not exhaustive in nature...
"Honest enterprise, by means of companies is allowed but the public are
protected against kitting and humbuggery"
It can be well understood from all the reasons stated above, that those who
enjoy the machinery of separate legal identity must precede with caution and
only to promote genuine business and commerce. Categories of agency, sham, et
cetera (as mentioned above under subtitle of judicial pronouncements) are there
to early guide the courts and are by no means exhaustive. More statutes and
criteria can come up in the future in the pursuit of justice in corporate law.
Allowing Arbitrators to lift the corporate veil in the future might be one such
 Hans Thummel, Piercing the Corporate Veil- Germany, 6 INT1
Bus. LAW. 282 (1978)
 All Answer Ltd. (November 2018). Lifting of the Corporate
Veil. Retrieved from
 Re: London and Globe Finance Corporation. (1903) 1 Ch.D. 728
  A.C .22. (He received shares worth 20, 000 pounds,
debentures worth 10, 000 pounds and 1000 pounds in shares.
Except for Aron Salomon himself the other subscribers were his wife and five
children who took up one share each. Later on the business collapsed and Salomon
claimed to be a secured creditor on the basis of the debentures he
had. The liquidator was of the opinion that Mr. Salomon and the
company were essentially the same ergo he would not be prioritised over the
other creditors in this waterfall mechanism system.)
 ILR (1886) 13 Cal 43.
 (1925) AC 619. (Macaura was substantial creditor and held almost
all shares of a timber company and had insured the company under his
own name. Subsequently there was destruction of the timber by fire and the
insurance company was held not liable to Mr. Macaura but to the company
instead because it was the company which owned the timber trees and not him.)
 Littlewoods Mail Order stores Ltd. v. IRC  1 WLR1241.
 The Companies Act, 2013.
 (1873)LR8CP427.(Wherein a railway company had invited loans on some
debentures even after exhausting the limit mentioned in the objective clause.
The loans in question due to their nature of being ultra virus of the objective
clause were held to be void.)
  2AC307. (A company was incorporated in the city of London
(by a German company) to sell tyres manufactured in Germany.
Pertinent facts to note are two first that the majority shareholders
were of Germany origin and secondly that this case took place during
the time when a war was declared between England and Germany.)
  1CH 935. (Mr. Horne was an employee of Gilford Motor Company
and as per the provisions of his employment contract was barred from
soliciting the customers of the company. To work ground such a
restriction Mr. Horne floated a company under his wife's name and attracted
customers of the Gilford Motors Company. The Court opined that the
company was created to only to mask the business being carried out by Mr.
Horne and that the sole purpose of incorporating this new company was to
 AIR 1927 Bom. 371, (Mr. Maneckjee invested in four private companies
in exchange for their shares. The income generated from dividends and
interests was given back to Mr. Maneekjee under the pretence of a loan.
The court opined that the companies were simply vehicles of tax
evasion and that the company was nothing more than Mr. Dinshaw Maneckjee
 AIR 1986 SC 1, J Reddy opined "new company is created, wholly
owned by the principal company with no assets of its own except those
transferred to it by the principal company, with no business or income of its
own except receiving dividends from shares transferred to it by the principal
company an serving no purpose whatsoever except to reduce the gross profits of
the principal company. These facts speak for themselves."
 1987 Del HC.
 AIR 1994 Del 25., (the court has passed an interim order directing a
company to not enter into any joint ventures and irrespective of the
interim order the company through its fully owned subsidiary entered
into a joint venture in India, the Court held this to be not in contempt of
court and that the subsidiary is not to be considered a joint venture.)
 AIR 1986 SC 1.
 1983 Del HC., (the order had pierced the corporate veil in
pursuit of justice but the wide amplitude of matter of public policy
was also acknowledged. The Court held that the ambit of the exception
created to the rule of separate legal entity ought to be as small
as as to not disregard the principle in totem.)
  4 All ER 116.
 Id., "1) That the profits of the subsidiary's business should
be treated as that of the holding company 2) The person taking are of
subsidiary's business should be appointed by holding company 3) The holding-
company should take care of the business of the subsidiary and decided as to
what should be done, how and when 4), The profits of the subsidiary should be as
a result of skill and direction of holding company 5) The holding company must
have an effective and constant control."
 926 F. Supp. 407 (S.D.N.Y. 1996) "Suing a parent corporation on
an agency theory is quite different from attempting to pierce the corporate
veil. In the first instance, the claim against the parent is premised on the
view that the subsidiary had authority to act and was, in fact acting on the
parent behalf � that is in the name of the parent."
  EWCA Civ 525. (The plaintiff (an employee of the
subsidiary) was exposed to asbestos which gave him a disease. By the
time the symptoms became perceivable the subsidiary company
had shut down therefore he brought forward his complaint against the
holding company. The court held lifted the corporate veil and held
in the favour of the plaintiff and also established four seenarios
where duty of care was deemed to be present 1) when the
business of both the present and subsidiary are same, or almost similar 2)
when the present company is supposed to have a superior knowledge
of the aspects to health and safety related to the particular industry 3) when
the present company was supposed to know of the subsidiary
system of work and that the said work was unsafe in nature 4) when
the present company could have reasonably fore see that the subsidiary company
or its employees would rely on it, as the parent company is
supposed to have a superior knowledge of the nature of activities
conducted by the parent.")
 0 1897 AC 22.
 2012) 6 SCC
  EWCA CIV 808
 Niranjan V., "VTB Capital The Consequences of Lifting the Corporate
Veil" available at
 Cassels, Jamie, "The Uncertain Promise of Law: Lessons from Bhopal"
 Union Carbide Corporation v Union of India 1990 AIR 273, 1989 SCC(2)
540 (the court opined that "Persons harmed by criminal acts of a
multinational corporation are not in a isolate which unit of the enterprise
caused the harm, yet it is evident that the multinational enterprise
that caused the harm is liable for such harm.")
 Carston Alting "Piercing The Corporate Veil in America and German
Law- liability of Individuals and Entities": A Comparative View, 2
TULSA J COMP. & INT'L. 187.
 433 A.2D 752 (Me. 1981)., (The officers of the subsidiary had "urged
the Plaintiffs to dedicate themselves to the financial success of
Kennebec River Pulp & Paper Co. (the subsidiary), personally promising
that Penntech Papers, Inc. (the holding company) would stand behind
their salaries, despite Kennebee's Financial Difficulties." The court
to prevent injustice and on the grounds of Equitable Estoppel lifted the
 1905) 142 F edn. 247 (the Hon'ble Supreme Court opined that "Where
the notion of legal entity is used to defeat public convenience,
justify wrong, protect fraud or defend crime, the law disregard the
corporate entity and treat it as an association of persons.")
 Jeffery M. Colon, "Changing U.S. Tax Jurisdiction: Expatriates,
Immigrants, and The Need For A Coherent Tax Policy", 34 SAN DIEGO L.
REV. 1 199
 Thompson, Robert B. (1991), "Piercing the Corporate Vil An Empirical
Study", Cornell Law Review, 76 1036-1074
 Rands, William J. (1998) "Domination of a Subsidiary by a Parent"
(PDF). IndianaLaw Review. 32:421.
  BCLC 480.  BCC 638 (QB)...(the plaintiff claimed
that his was wrongfully dismissed from his post at
Breachwood Welwyn Ltd. (Subsidiary to Breachwood Motors Ltd.)
but before he could claim for relief the subsidiary
shut down therefore Mr. Creasy sued the present company (Breachwood
 Supra note 30
  Ch. 433 CA (Civ Div)
 Oct. 7, 1988 (C.A)
 Robert B. Thompson, "Piercing the Corporate Veil: An Empirical
Study", 76 Cornell L. Rev. 1036, 1039 (1991)
 Supra Note 4
 (2011) 5 SCC 532. (Case delt with the scope of section 8 of
Arbitration and Conciliation Act, 1996.)
 Id. (Generally, only right in personam was seen to be under the
ambit of arbitration, Although this is a flexible rule.)
 Id. ("The well recognized example of non- arbitrable dispute
are (i) dispute relating to rights and liabilities which give rise to or arise
out of criminal offences (ii) matrimonial disputes relating to divorce,
judicial separation, restitution of conjugal rights, child custody, (iii)
guardianship matters, (iv) insolvency and winding up matters, (v)
testamentary matters (grant of probate, letters of
administration and succession certificate), (vi) eviction or tenancy matter
governed by special statutes where the tenant enjoys statutory
protection against eviction.")
 2016 SCC OnLine SC1110
 Id, ''Following categories of disputes are generally treated as non-
arbitrable:1) patent, trademarks and copyright: 2) anti-trust/competition
laws:3) insolvency/winding up:4) bribery/corruption:5) fraus:6) criminal
 2017 SCC OnLine Del 8345, (Universal Empire institute of
Technology (UIET) and Indira Gandhi National Airport Open University
(IGNAON) agreed to a distance education project in Dubai. In said agreement as
dispute arose and the matter was called for arbitration as per the relevant
clause of the agreement. UIET was a company with 99% shares with Mr.
Sudhir, who was the managing director as well. His wife was also a director
of the company. The defendants argued that since the petition was
filed jointly with UIET the petitioner will also be bound to
the arbitration clause. But the Petitioner wanted to represent
UIET as a managing director. He argued that the he was not in his personal
capacity liable to the arbitration clause. The court had lifted the corporate
veil as the company was committing fraud and hence held the Mr.
Sandhu as an Alter Ego liable for the company obligations.)
 2017 SCC Online Del 11625, (GMR energy filed a suit to stop
Doosan Power System India from filing a suit in the Singapore
International Arbitration Centre (SIAC). The court held that since the issue of
alter ego is not mentioned in the list of Non-arbitral disputes
in the cases of Booz Allen and Ayyasamy the Corporate veil cannot be
 Cadman, "The Corporation in New Jersey", (1949) 353