CHAPTER 1

1. INTRODUCTION:The company is at law a different person altogether from the subscribers to the
Memorandum and, although it may be that after incorporation the business is
precisely the same as it was before, and the same persons are managers, and the
same hands receive the profits, the company is not in law the agent of the
subscribers or the trustee for them. Nor are subscribers as members liable, in any
shape or form, except to the extent and in the manner provided by the Act.
-Lord McNaughtenSoloman v. Soloman and Co.,1
The term company has been taken from an Italian word campaignia which means,
a body of persons associated for purposes of business, sometimes, but not now so
frequently as some years ago, styled a joint stock company.2
In State of Uttar Pradesh v. Buland Sugar Co. Ltd., 3 the Supreme Court was of the
view that, Company means- (i) any Indian company, or (ii) any association whether
incorporated or not and whether Indian or non-indian, which is or was accessable or
was assessed as a company as a company for the assessment for the year ending on

1 (1897) A.C 22 (H.L)

2 See, Whartons Law Dictionary, Universal Publishing Co. New Delhi, at p.208
3 AIR 1979 SC 1104

the 31st day of March, 1948, or which is declared by general or special order of the
Central Board of Revenue to be company for the purposes of this Act.
However, The Companies Act, 2013 gives a narrower definition as, a company
incorporated under this Act or under any previous law. 4 Thereby it validates all the
companies you are incorporated in India under any Act in force at that moment.
The most exhaustive and accepted definition is given Halsburys Laws of England
which defines company as, a collection of many individuals united into one body
under a special domination, having perpetual succession under an artificial form, and
vested by policy of law with the capacity of acting in several respects as an
individual, particularly of taking and granting property, of contracting obligations,
and of suing and being sued, of enjoying privileges and immunities in common, and
of exercising a variety of political rights, more or less extensive, according to the
designs of its institution, or the power upon it, either at the time of its creation or at
any subsequent period of its existence.5
The modern corporation (or company and any other form of business association)
has the attributes of legal personality and shareholders limited liability. The
attribute of legal personality allows the corporation to have rights, own assets,
contract and be liable for its acts.6 The attribute of limited liability, on the other
hand, limits shareholders liability for the companys acts merely to the extent of

4 Section 2(20)
5 Halsbury, Laws of England, p. 301
6 See, Ivamy, H. Dictionary of Company Law. London: Butterworths; 1983. At page 43

their contribution to the companys assets.7 These attributes of the modern joint
stock corporation have been key for the development of modern society.
Section 9 of the Companies Act, 2013 provides that in the event of the company
being wound up, the members shall have liability to contribute to the assets of the
company in accordance with the Act. In case of limited companies, no member is
bound to contribute anything more than the nominal value of shares held by him.
The privilege of limiting the liability is one of the main advantages of carrying on
business under a corporate organization.
Commenting on the advantages of limited liability Buckley, J. observed, The
statutes relating to limited liability have probably done more than any legislation of
the last fifty years to further the commercial prosperity of the country. They have, to
the advantage as well of the investors as of the public, allowed and encouraged
aggregation of amall sums into large capitals which have been employed in
undertakings of great public utility largely increasing the wealth of the country.8
However, corporate personality and limited liability have also made the joint stock
corporation a suitable device for the practice of fraudulent acts. Therefore, the
piercing9 of the corporate veil is a means to prevent and punish the use of the
corporate personality for fraudulent purposes.
Lawton, L.J. observed that, The fact that limited liability has all too often enabled
many to enrich themselves at the expense of those who have given credit to the

7 Ibid
8 Re London & Globe Finance Corporation (1903) 1 Ch. 728 (731)
9 English lawyers often use this term interchangeable with lifting

companies they control. Is the price the business world has to pay for the
potentiality for growth and convenience which goes with limited liability? 10
When a company acquires legal personality, there are essential attributes attached to
it. Some of the attributes include that the company will acquire its own name, it can
enter into contracts, hold and administer property in its own name, incur
liabilities, can sue and be sued and perform other juridical acts in conformity with
the law. Similarly, as the company is a legal person separate from its shareholders,
the latter will not be liable for the companys debts so long as they have paid their
subscribed shares. In this respect the share companies and private limited
companies differ from partnerships in that the latter do not enjoy limited liability.
The piercing of the corporate veil sets aside the corporations legal personality in
order to make shareholders liable for the companys acts. Although this may
appear to be an easy task, it is far from so. In fact, there is a dilemma about
whether or not to ignore the corporate personality. This dilemma arises from the fact
that the purpose of the corporate entity is to protect investors from a risk that
involves a commercial adventure via transferring the risk of an enterprise to
creditors and third parties. Indeed, the corporate entity can be used in ways that
may produce an unfair result and consequently enable fraud. Undisputedly,
unfairness is present when a corporate entity defaults but if the corporate personality
were easily disregarded every time unfairness and fraud are argued, there would
be

no

benefit

from

its

use. Moreover, investors would hesitate before

participating in risky enterprises were their assets to be exposed and thus all socioeconomic benefits would be lost.
The demonization of separate legal entity have made lifting the corporate veil need
of the hour as we can see its effect in the instance of Bhopal Gas Tragedy where the
10 Rolled Steel Products (Holdings) Ltd. v. British Steel Corporation (1985) 2 WLR 908

victims and Indian government both tried to reach the parent company namely the
Union Carbide Company by installing a suit in the US federal court. The reason for
that was according to the laws in force at that time the parent company (Union
Carbide Company) could not be held liable by the wrongs done by its subsidiary
company (Union Carbide India Limited), and the Indian law could not affect the
piercing of corporate veil unless there are offences involving frauds and tax evasions;
and the courts were hell bent on protecting the limited liability of the share holders.11
As the Supreme Court has observed in Life Insurance Corporation of India v.
Escorts Ltd.12 that:While it is firmly established ever since in Salomon v. Salomon & Co. Ltd. [(1897)
AC 22] that a company is an independent and legal personality distinct from the
individuals who are the members, it has since been held that the corporate veil may
be lifted, the corporate personality may be ignored and trhe individual members
recognized for who they are in certain exceptional circumstances. Generally, and
broadly speaking the corporate veil may be lifted where the statute itself
contemplates lifting the veil or fraud or improper conduct is intended to be
prevented, or a taxing statute or a beneficial statute is sought to be evaded or where
associated companies are inextricably connected as to be, part of one concern.
The Doctrine of corporate veil being an exception to general rule of limited liability
was created to prevent injustice. As such, the application of the doctrine has always
been face specific and open ended. Justice requires a flexible legal standard that

11 Chopra Sudhir K.. Multinational Corporations in the Aftermath of Bhopal: The Need for a New
Comprehensive Global Regime for Transnational Corporate Activity Valparaiso University Law Review,
Volume 29, No. 01, [1994], Art. 03.
12 [1986] 59 Comp. Cas. 548 (SC)

allows room for the weighing of equity and policy considerations. Some degree of
open endedness is thus probably inherent in the doctrine.13

2. Research Problems Framework:We know that a corporation is an entity quite separate and apart from the individual
shareholders and hence the shareholders will not be liable for the companys debts
so long as they have paid their subscribed shares. Though limited liability is an
advantage for share holders, it may greatly affect the traditional debtor-creditor
relationships. Limited liability can have negative effects on creditors in different
ways.
First, it opens opportunities for both express and tacit misrepresentation in
transactions with creditors. Share holders who employ the corporate form through
which to contract with others may misrepresent the assets within the corporation and
simply walk away if the business fails.14 Second, limited liability makes it possible
and sometimes attractive to shift assets out of the corporation after a creditor has
extended credit to the corporation. It would be simple to shareholders to distribute
assets to themselves- particularly in case of one man and closely held companieswhile leaving the debts with their corporation in violation of creditors right. Or
more subtly, shareholders or directors may undertake highly risky (volatile)
investments or increase leverage in order to shift uncompensated risk on to the
shoulders of creditors.15
13 Cheng, Thomas K. The Corporate Veil Doctrine Revisited: A Comparative Study Of the English and
the U.S. Corporate Veil Doctrines Boston College International and Comparative Law Review, Volume 34,
Issue 2, Article-02.
14 Allen William T., Kraakman Reinier, and Subramanian, Commentaries and cases on the law of
nd
business organizations, (2 ed.), Aspen publishers, New York, 2007, p. 131
15 Ibid, p.132

All of these and other opportunistic moves would lose much of their appeal if share
holders did not have the shield of limited liability to protect their personal assets
from the consequences of contractual default on the part of the corporation. To this
end, courts, particularly the common law courts, apply the doctrine of piercing or
lifting the corporate veil to make share holders and directors, or managers liable to
third party creditors.
To pierce the corporate veil, common law courts use different grounds: A disregard
of corporate formalities, thin capitalization, unity of interest and ownership
that the separate personalities of the corporation and individuals no longer exist, in
case of parent-subsidiary companies if corporations are not operated as separate
entities but rather integrate their resources to achieve a common business purpose,
and if adherence to the fiction of separate corporate existence would sanction a
fraud or promote injustice, are some, among plenty, of reasons to pierce the
corporate veil.16
Under Indian law, corporations have distinct corporate personality and liability
and shareholders are liable only to the extent of their share holdings. Accordingly,
liabilities of a share company are met only by the assets of the company and the
liabilities of the corporate entity of a share company are limited to the total value
of its assets. Hence, the shareholders of a share company are liable only to the
extent of their share holding. Once the shareholder paid the par value and any
premium agreed, he is no longer liable to contribute anything further towards
meeting the companys debts and liabilities. However, India, like other countries
provide an exception to the rule of separate personality and limited liability.

16 Ibid, p. 155

However they are many statutory provisions in the Companies Act, 2013 which
provides for certain cases where the court can lift the corporate veil and do away
with the limited liability of the Directors or members of the company which are
discussed briefly below.
Misdescription of name17 is the first basis, whereby if the name of the company is not
properly mentioned, and then the company or its officers can be held liable and shall
be punished with a fine.
Mis-statements in Prospectus18 is another ground where every director, promoter,
expert or every other person can be held liable to compensate the loss suffered to any
other person due to such mis-statement made in the Prospectus.
In cases where the issue of shares by a company to the public has not been received
within a stipulated time as per rule 11 of Companies Rules, 2014 then the application
money is to be repaid. If its not repaid in time then the directors or the officer of the
company shall be held liable to repay the money with interest.19
In order to facilitate the task of an inspector appointed to investigate the affairs of the
company, the corporate veil of the company can also be removed towards such
director or person who may come under such investigation.20
The central government may appoint one or more inspectors to investigate and report
on the membership of any company for the purpose of determining the true persons
17 Section 12
18 Section 35
19 Section 39
20 Section 219

who are financially interested in the company and who controls its policy or
materially influences it.21
Where in the case of winding up of a company, it appears that any business of the
company has been carried out with the intent to defraud the creditors or any other
person, then the tribunal can make persons involved personally liable for such
fraudulent conduct.22
However, the corporate veil can also be pierced for ultra vires actions, arrears of
revenue and the violation of FERA23.
But despite of some statutory provisions which points directly towards the lifting of
corporate veil, there are some circumstances whereby, the court have ordered the
piercing with natural justice and constitutional over ride, like in case of
determination of enemy character of a company, or for protection of revenue, or for
the sake of public policy, or for the precautions for welfare legislations etc.
A detail study is needed to be conducted so far to examine the above issues in
relation to the doctrine of piercing the corporate veil in India. Hence, this study
attempts to exhaustively examine the application of the doctrine of piercing the
corporate veil in Indian laws, by making a further discovery of other
possible statutory grounds with a view to resolving the above mentioned
issues, and its practical application by the Indian courts.
To achieve this purpose the research questions are designed as follows:

21 Section 216
22 Section 339
23 Foreign Exchange Regulation Act, 1973

 What are the possible statutory grounds of piercing the corporate veil
under Indian laws?
Do the Indian courts apply the doctrine of piercing the corporate veil? How?

3. Objectives of the Research:The main objective of the study is to exhaustively examine the application of the
doctrine of piercing the corporate veil in Indian laws and its practical application
courts after making a brief survey of the doctrine in the British and American legal
systems.
The study is designed to achieve the following objectives: To trace the origin of the doctrine of lifting of corporate veil.
To make a short survey of the doctrine in the common law legal system.
To evaluate the statutory provisions regarding the doctrine provided in the
Companies Act, 2013.
To study the application of doctrine under the judgments and precedents
provided by the Indian courts.
To explore the application of the doctrine of piercing of corporate veil in
Indian legal system.

4. Scope of the Study:The study focuses on the assessment of the doctrine of piercing the corporate veil in
private companies and it does not apply for public enterprises. This is because,
though public enterprises are formed under and governed by the provisions of the
Companies Act, their formation has not always been dictated by profit making but
rather provision of public utilities. Moreover, though arguments are raised to the fact
that the doctrine of piercing the corporate veil also applies in criminal matters, this
study concentrates on matters of civil and commercial debts or commitments.

To assess the doctrine of piercing in private companies, the study mainly bases itself
on the close analysis of the Companies Act, 2013 and other related laws and the
analysis of decided real cases related to the issue.

5. Research Methodology:In the course of the study the researcher employed is purely doctrinal in nature. To
this end, the researcher analyzed legal provisions of the Companies Act, 2013 and
other related laws. He also looked into other published and unpublished literatures
in the area. The secondary material consists of text books, journals, case reports,
articles, encyclopedias, dictionaries, research papers, magazines etc were reviewed
and some decided real cases were analyzed. Use of internet is also made together
important information relation to the subject of study.

6. Limitations of Research:The researcher, in the due course of the study, faced different challenges
and obstacles. These obstacles, among others, include shortage of time and
budget, difficulty of easily finding the concerned literature and difficulty of
finding the appropriate case to the issue at hand due to cumbersome and
unmodernized case handling system of Indian courts. Also, the limitation in
computer operation also came out as a problem. Yet, the writer believes
that the cases analyzed and attached in this work can depict a certain picture
about the role and stand of courts in the issue at hand.