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Lifting the Corporate Veil in Company law

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[1]). The Principal holds that a company "is an independent person with its rights and liabilities".[2]

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.[3] However, such rights can only be enjoyed in the absence of malpractice and abuse of provision under the corporate personality.

The 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 conciliation.

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.[4] Salomon a sole proprietor sold his manufacturing business to a limited liability company that he had himself floated.

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.[5] 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 another entity.

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"[6].

In Macaura v. Northern Assurance Co. Ltd. [7] 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 persons."[8]

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.

Statutes
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 companies.[9] 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.[10]

Judicial Pronouncements
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.

Enemy Characterisation
For determination of enemy character let us look at the case of Diamler Company Ltd. v. Continental tyre & Rubber Co[11]. 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[12].

For Protection of Revenue
A company cannot simply be created and used for avoiding taxation as held in Sir Dinshaw Maneckjee Petit.[13]

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 Industry Ltd.[14] 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[15] 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[16].

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[17]. 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 Jain.[18]

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[19]. 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 relationship.[20]

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[21] , The courts said to be vigilant in the matters of agency when lifting the corporate veil.

Negligent Acts

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[22]. 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.

Criminal Liability

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.[23] 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[24] 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[25] 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[26]) 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[27]. Such can be understood from the infamous Bhopal Gas tragedy[28].

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 cut categorisation.[29]

The U.S.
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[30]. 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[31]. There are empirical studies that show that the plaintiff is granted relief in 40% of the cases that were reported[32]. Lifting the Corporate veil is ''the most litigated issue in corporate law in the United States''.[33] The most forefront theories in the US lad emphasis on the ''alter ego''.[34]

Summarising, three basic prongs can be seen in the US:

  1. Unity of interest and ownership the separate personalities of the shareholder and corporate cease to exist
  2. Wrongful conduct wrongful action taken by the corporation, and
  3. Proximate cause: as a reasonably foreseeable result of the wrongful action, harm was caused to the party that is seeking to pierce the corporate veil.[35]

The U.K.

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 Motors, Ltd.[36] The British Court in a similar fashion to the America case Anderson V. Kennebec[37] pierced the corporate veil in pursuit of promoting justice for the plaintiff.[38]

The courts of both countries use similar terms such as "alter ego" (used by us courts in the case Adams v. Cape Industries plc.[39]and by the UK Courts in the case of Security Exchange Ltd. V. Gordon, Transcript of Hearing.[40]) 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).[41]

India

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[42] 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 pronouncements.

Recent Developments

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[43]. 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[44] and for matters necessary by implication the test of right in rem v. Right in persona was laid down".[45]

However, The examples given in para 36 of the judgement was not an exhaustive list of non-arbitrable disputes.[46] Later on the Supreme Court in A. Ayyasamy v. A Paramasivam and Ors[47] Further brought forward a list of non-arbitrable dispute.[48] 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[49] (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.[50] (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...

Conclusion
"Honest enterprise, by means of companies is allowed but the public are protected against kitting and humbuggery"[51]

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 criteria.

End-Notes:
[1] Hans Thummel, Piercing the Corporate Veil- Germany, 6 INT1 Bus. LAW. 282 (1978)
[2] All Answer Ltd. (November 2018). Lifting of the Corporate Veil. Retrieved from
https:www.lawtecher.net/free-law-essays/business-law/article-on-lifting-of-the-law- essays.php?vref=1
[3] Re: London and Globe Finance Corporation. (1903) 1 Ch.D. 728 at 731.
[4] [1897] 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.)
[5] ILR (1886) 13 Cal 43.
[6] Id.
[7] (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.)
[8] Littlewoods Mail Order stores Ltd. v. IRC [1969] 1 WLR1241.

[9] The Companies Act, 2013.
[10] (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.)
[11] [1916] 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.)
[12] [1933] 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 commit fraud.)
[13] 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 himself.)
[14] 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."
[15] 1987 Del HC.
[16] 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.)
[17] AIR 1986 SC 1.

[18] 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.)
[19] [1939] 4 All ER 116.
[20] 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."
[21] 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."
[22] [2012] 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.")

[23] 0 1897 AC 22.
[24] 2012) 6 SCC
[25] [2012] EWCA CIV 808
[26] Niranjan V., "VTB Capital The Consequences of Lifting the Corporate Veil" available at
[27] Cassels, Jamie, "The Uncertain Promise of Law: Lessons from Bhopal"
[28] 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.")
[29] 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.
[30] 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 corporate veil.)
[31] 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.")
[32] 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
[33] Thompson, Robert B. (1991), "Piercing the Corporate Vil An Empirical Study", Cornell Law Review, 76 1036-1074
[34] Rands, William J. (1998) "Domination of a Subsidiary by a Parent" (PDF). IndianaLaw Review. 32:421.
[35] Id.
[36] [1993] BCLC 480. [1992] 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 Motors).)
[37] Supra note 30
[38] Id.
[39] [1990] Ch. 433 CA (Civ Div)
[40] Oct. 7, 1988 (C.A)
[41] Robert B. Thompson, "Piercing the Corporate Veil: An Empirical Study", 76 Cornell L. Rev. 1036, 1039 (1991)
[42] Supra Note 4
[43] (2011) 5 SCC 532. (Case delt with the scope of section 8 of Arbitration and Conciliation Act, 1996.)
[44] Id.
[45] Id. (Generally, only right in personam was seen to be under the ambit of arbitration, Although this is a flexible rule.)
[46] 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.")
[47] 2016 SCC OnLine SC1110
[48] 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 matters."
[49] 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.)
[50] 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 lifted.)
[51] Cadman, "The Corporation in New Jersey", (1949) 353

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