2. LIFTING OF CORPORATE VEIL
CORPORATE VEIL
By a fiction of law, a company is seen as a distinct entity separated from its members, but in
reality, it is an association of persons who in fact the beneficial owners of the company and its
corporate property. This fiction is created by a veil and is called the Corporate veil
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3. LIFTING OF CORPORATE VEIL
CORPORATE VEIL
A corporate veil is a legal concept that separates the acts done by the companies and
organizations from the actions of the shareholders. It protects the shareholders from being
liable for the actions done by the company. This is not an absolute right the court depending
on the facts of the case can take the decision whether the shareholder is liable or not.
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4. LIFTING OF CORPORATE VEIL
Lifting or piercing of corporate veil means ignoring the fact that a company is a separate legal
entity and has a separate identity (Corporate personality). This concept disregards the
separate identity of the company and looks behind the true owners or real persons who are in
control of the company.
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5. REASONS FOR LIFTING OF CORPORATE VEIL
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1.Where the Company is a Sham (Fraud): Gilford Motor Company vs
Horne (1933)
•Mr. Horne was a former Managing Director of Gilford Motor Home Company
Ltd. His employment contract stipulated a condition that he should not solicit
customers of the company once he leaves his job.
•Mr. Horne was fired from his position and job. Thereafter, he established a
competing company with his wife, himself, and one of his friends, who were
the sole shareholders. The company established by Horne has lower price
tags than that of Gilford’s company.
•The shareholders started soliciting the customers of Gilford Motor Company.
6. REASONS FOR LIFTING OF CORPORATE VEIL
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1.Where the Company is a Sham (Fraud): Gilford Motor Company vs
Horne (1933) ( CONTINUED)
It was held that the company was set up to evade Horne’s contractual
obligations and was used as an instrument of fraud to conceal Mr. Horne’s
illegitimate actions. The court pierced the corporate veil and ordered an
injunction against Horne.
7. REASONS FOR LIFTING OF CORPORATE VEIL
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2. AGENCY
RG Films Ltd (1953)
•An American company financed the production of a film in India in the name
of a Britain company.
•90% of the shares in the British Company was held by the president of an
American Company. The company had no business other than its registered
office and it had no staff also.
•Thereafter, the film at the time of release was refused by the Board of Trade
to register it as a British film because the British company acted merely as an
agent of an American company.
8. REASONS FOR LIFTING OF CORPORATE VEIL
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3.Public Policy: Connors Bros vs Connors (1940)
•In this case the acts done by the members of the company led the court to
lift the corporate veil to punish the offenders as the company had been
formed to accomplish an act that is against the public policy.
•The principle was applied against the managing director who made use of
his position to contrary to the public policy.
The House of Lords determined the character of the company as an enemy
company because the persons who were de facto who were residents of
Germany, which was at war with the British during that time.
9. REASONS FOR LIFTING OF CORPORATE VEIL
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4. Determining True Character of the Company: Daimler Co. Ltd vs Continental Tyre and
Rubber Co. Ltd (1916)
WON
10. REASONS FOR LIFTING OF CORPORATE VEIL
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4. Determining True Character of the Company: Daimler Co. Ltd vs Continental Tyre and
Rubber Co. Ltd (1916)
•A private company ,Continental Tyres was incorporated in England for the purpose of selling
motor tires manufactured in Germany and was a German company.
•The German company has almost all of the shares in their position and all the directors of the
company were Germans.
•During the First World War, the English company Daimler Co commenced an action for
recovery of Trade debt.
•The House of Lord held that the company was an enemy company for the purpose of trading
because its effective control or the management was in the hands of Germans.
The court held that it would against public policy if there is a trade among them and hence it was
decided that the company will not be allowed to proceed with the action.
11. REASONS FOR LIFTING OF CORPORATE VEIL
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5.Protection of Revenue (Tax Evasion): The corporate veil may be ignored
if the company is formed merely to evade tax.
Sir Dinshaw Maneckji Petit (1927)
This is a landmark case law where the corporate veil was lifted to make the actual person
behind the sham companies liable for a super-tax on an aggregated income. It was an
instance of the sham transfer, even though the transaction ends with the formal registration of
the document before the Registrar.
12. REASONS FOR LIFTING OF CORPORATE VEIL
5. Protection of Revenue (Tax Evasion): The corporate veil may be ignored if the
company is formed merely to evade tax.
Sir Dinshaw Maneckji Petit (1927)
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4 companies
Invested
Loan (Never
Repaid)
13. REASONS FOR LIFTING OF CORPORATE VEIL
STATUTORY PROVISIONS
1. Reduction of number of members below the statutory
minimum
Public company : Min members : 7
Private Company : Min members :2
If it falls below 7 for public and below 2 for private and members
even after knowing this working beyond six months, then
members are held liable for the debts of the company until the
min member requirement is fulfilled.
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14. REASONS FOR LIFTING OF CORPORATE VEIL
STATUTORY PROVISIONS
2. Failure to refund application fee
As per Section 42 (6) of the Companies Act, 2013, “any allotment of securities shall be made
within 60 days from the receipt of application money and in case the company is not able to
allot the securities within the said period of 60 days, it
shall repay the application money within 15 days thereafter, failing which it will be required to
be repaid with interest at the rate of twelve percent per annum from the expiry of 60th
day.
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15. REASONS FOR LIFTING OF CORPORATE VEIL
STATUTORY PROVISIONS
3. Misdescription of company’s name: An officer of an organization
(company) who signs any bill of trade, hundi, promissory note, cheque wherein
the name of the organization isn’t referenced in the recommended way, such
official can be held personally liable to the holder of the bill of trade, hundi, etc.
except if it is properly paid by the company.
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16. REASONS FOR LIFTING OF CORPORATE VEIL
STATUTORY PROVISIONS
￮ 4. Fraudulent Trading
￮ Under Section 339 of Companies Act, 2013, if any business of an
organization is gone ahead with the aim to defraud creditors of the
organization or creditors of some other individual or for any deceitful
reason, who was intentionally a party to the carrying on of the business in
that way is subject to imprisonment or fine or both.
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17. REASONS FOR LIFTING OF CORPORATE VEIL
STATUTORY PROVISIONS
5. For investigating company’s ownership: Under section 216 of the
Companies Act, 2013, the Central Government may appoint Inspectors to
investigate and report on the membership of the company for the purpose of
determining the true individuals who are financially interested in the company
and who control its policy. Thus, the Central Government may ignore the
Corporate veil.
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