The Doctrine of Corporate Veil

The doctrine of corporate veil is a legal principle that recognizes the separate legal personality of a company from its members. It means that the company is an independent entity that can own property, enter into contracts, sue and be sued in its own name, and is not liable for the debts or obligations of its members.

However, there are certain circumstances where the courts may lift or pierce the corporate veil and look behind the facade of the company to identify the real persons who are in control or responsible for its actions. This is done to prevent fraud, abuse, evasion or injustice that may arise from the misuse of the corporate personality by its members.

In this blog post, I will discuss some of the provisions under the Indian Companies Act, 2013 that allow the lifting of corporate veil and some of the case laws that illustrate this doctrine. The main grounds under which the corporate veil can be lifted are:

- Fraud or misrepresentation: The court may apply the doctrine of lifting of corporate veil to identify the culprit in case any person makes false, deceptive, misleading, untrue statements, untrue promises or conceals relevant data to induce another person to invest money in the company.

- Agency or trust: The court may lift the corporate veil to hold the members liable as agents or trustees of the company if they act on behalf of or for the benefit of the company.

- Group of companies: The court may lift the corporate veil to treat two or more companies as one entity if they are under common control or management and have a common economic interest.

- Public interest: The court may lift the corporate veil to protect public interest, national security, revenue or justice if the company is used as a device to evade legal obligations or commit illegal acts.

- Statutory provisions: The Companies Act, 2013 also contains some specific provisions that authorize the lifting of corporate veil in certain situations, such as:

- Section 7(7): If a company is registered by furnishing false or incorrect information or by suppressing any material fact, then the Tribunal may pass an order to wind up such company and also hold liable every officer who is in default.

- Section 45: If a member of a company limited by shares transfers his shares to another person with an intent to reduce his liability for any calls made by the company, then he shall remain liable for such calls as if no transfer had taken place.

- Section 212: If an investigation into the affairs of a company reveals that any fraud has been committed by any person in relation to the company, then such person shall be liable for action under section 447 (punishment for fraud) and also for any other liability imposed by this Act or any other law.

- Section 339: If in the course of winding up of a company, it appears that any business of the company has been carried on with intent to defraud creditors or for any fraudulent purpose, then the Tribunal may declare that any persons who were knowingly parties to such conduct shall be personally responsible for all or any of the debts or liabilities of the company.

Some of the landmark cases that demonstrate the application of this doctrine are:

- Salomon v. Salomon & Co. Ltd. (1897): This is the leading case that established the principle of separate legal entity and limited liability of a company. In this case, the House of Lords held that a company is distinct from its members and creditors cannot sue them for its debts.

- Tata Engineering & Locomotive Co. Ltd. v. State of Bihar (1964): This is one of the earliest cases where the Supreme Court lifted the corporate veil to treat two companies as one entity. In this case, it was held that Telco and Tata Motors were under common control and management and had a common economic interest, and hence they were liable to pay sales tax as one dealer.

- Life Insurance Corporation v. Escorts Ltd. (1986): This is another case where the Supreme Court lifted the corporate veil to protect public interest and national security. In this case, it was held that FERA companies cannot acquire shares of Indian companies beyond a certain limit without prior approval of RBI and government, and hence LIC was justified in opposing such acquisition by Escorts Ltd.

- Vodafone International Holdings BV v. Union of India (2012): This is a recent case where the Supreme Court lifted the corporate veil to examine the substance and not just form of a transaction. In this case, it was held that the transfer of shares of a Cayman Islands company that indirectly held shares of an Indian company was not liable to capital gains tax in India, as it was not a sham or colourable device to evade tax.