Lifting the Corporate Veil

As the company is a separate legal entity , is has been provided with a veil, compared to that of individuals who are managing the company. But if the court feels that such veil has to been used for any wrongful purpose, the court lifts the corporate veil and makes the individual liable for such acts which they should not have done or doing in the name of the company

Contd
The corporate veil can be lifted either under the Statutory provisions or Judicial interpretations The statutory provisions are Provided under the Companies Act, 1956 The other circumstances are decided through Judicial interpretations, which are based on facts of each case as per the decisions of the court

A. Common Law Exceptions 1. Determination of Character of Co. Case: Daimler Co Ltd v Continental Tyre and Rubber (GB) Ltd (1916) C, a Pvt Co. was incorporated in England for the purpose of selling tyres manufactured in Germany by a German Co. The German Co. held the bulk of the shares in Co.

 During Ist world war, C Co. commenced an action to recover trade debt The house of Lord helds that the company C was an enemy Co. as control was in enemy hands. Held: The Co. was an alien enemy and the payment of debt to it would amount to trading with the enemy, So Company was not allowed to proceed.

2. Where the company is a sham Case: Gilford Motor Co Ltd v Horne (1933) H was a car salesman, and left G. His contract stated that he wasnt allowed to sell to Gs customers for a period after leaving. H set up a company which then approached his former customers; H argued that firstly his company was approaching the customers, not him; and

 secondly, if there was wrongdoing, his company was liable and not him. Held: The courts held that the company was sham

3. Protection of revenue Case: Sir Dinshaw Maneckjee Petit A.I.R D was a wealthy man getting huge dividend and interest income. He formed 4 Pvt companies and agreed with each to hold a block of investments as an agent for them. Dividend received were credited in the account of company and amount was handed back to him as a loan

Held: The court held that as the companies did no business, the four companies were nothing more than he himself

4. Prevention of fraud or improper conduct Case: Jones v. Lipman L agreed to sell a certain land to J. He subsequently changed his mind and to avoid the specific performance of contract he sold it to a company which was formed specifically for the purpose. The Co. had L and a clerk of his solicitors as the only members. J brought an action for the specific performance against L and the Co.

 Held: The court looked to the reality of the situation, ignored the transfer and ordered that the company should convey the land to J

5. When the courts recognize an agency relationship. Case: Re F.G Films Ltd. An English Co. was formed with a capital of $100 in $1 shares, 90 of which were held by an American the director of United States Film Co. and 10 were held by an another director, a British subject. The company produced a film called monsoon the production of which was financed by the company.

Held: The court refused to agree that the film was made by the British Co. and the co was merely the nominee or agent of United States Film Co

6. Avoidance of Welfare legislation: Case: Workmen of Associated Rubber Industry v. Associated Rubber Co. A subsidiary was formed to split the profits of the company so that the incidence of bonus in the hands of parent company will be reduced. Held: The court disregarded the existence of a separate company for the purpose of working out bonus for its employees

Statutory Exceptions
Reduction in membership- Less than seven in public company and less than two if it is a private company Failure to refund application money- After the issue of shares to the public, the company has to pay back the initial payment to the unsuccessful applicants (SEBI Guidelines- 130 Days), if they fail to do so, the corporate veil can be lifted. Mis-description of companies name- While signing a contract if the companys name is not properly described, then the corporate veil can be lifted.

Contd
Misrepresentation in the prospectus- (Derry Vs Peek) In case of misrepresentation, the promoters, directors and every other person responsible in this matter can be held liable. Fraudulent Conduct- In case the company is carried on with an intent to defraud the creditors, then the court may lift the corporate veil. Holding and subsidiary companies- A subsidiary has a distinct legal entity from the holding company other than in a few circumstances, so if otherwise shown, the court may under the Act , lift the corporate veil of the subsidiary company.