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AD PIERCING THE CORPORATE VEIL: A NECESSITY TODAY IN INDIA AND ABRO
1



INTRODUCTION


Among various other features, a company possesses separate legal personality as laid
down in Salomon v. A. Salomon and Co. Ltd
2
. It was held in the case of Bligh v. Brent
3
that the individual members of a corporation are quite as distinct from the
metaphysical body called the corporation, as any others of his Majestys subjects
are. This principle confers on the members of a company the benefit of not being
responsible for the companys debts except to the extent that they are made responsible
by statute or by the companys constitution neither do they have any proprietary interest

in the property of the company.

However, it is seen that human beings are the real and ultimate beneficiaries of the
corporate advantages. By fiction of law, a corporation is a distinct entity yet in reality,
it is an association of persons who are in fact the beneficiaries of the corporate
property.
4
But there lay exceptions to detect cases of fraud, improper conduct, tax
evasion techniques, statutory violations or obligations, tortuous liabilities, breach of
agreements or orientation of subsidiaries into breach of the contract for personal
motives or any such reason where the situation demands, the veil of separate legal
entity is lifted or pierced. The corporate veil is a metaphorical reference to the limited
liability of a company, based on the prevailing rule that when corporate formalities are
observed, initial financing is adequate, and the company is not formed to defraud
creditors or other third parties, the corporate form will be respected and shareholders
will be respected and shareholders will not be liable for corporate debts and liabilities.
5


Therefore, when courts lift or pierce the corporate veil, they disregard, the






1
Shweta Sahu, Student at National Law University, Odisha.
2
(1897) AC 22 (HL); J H Rayner( Mincing Lane) Ltd. v Department of Trade and Industry (1989) Ch
72.
3
(1837) 2 Y & C Ex. 268.
4
Gallaghar v Germania Brewing Company [1893] 53 MINN. 214.
5
Karin Schwindt, Limited Liability Companies: Issues in Member Liability (1997) 44 UCLA L. Rev.
1550 as cited in Jeffery K. Vandervoot, Piercing the veil of Limited Liability Companies: The Need for
a Better Standard (2004) 3 DePaul Business and Commercial law Journal 51, 57.

1
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separateness of the company and hold a shareholder responsible for the companys
actions as if it were the shareholders own.
6

Lifting the corporate veil helps in discovering the economic reality behind the legal
facade and prohibiting the indiscriminate malpractice of individual members vested
with personal economic interests.
7
Or if there is a suspicion by court under Sections 34
and 38 that the corporate personality is being used as a cloak for fraud or illegal
conduct, it will lift the veil.
The phrase piercing the corporate veil was described in a 1973 case as now
fashionable.
8
In 1987, the phrase lifting the corporate veil was referred to as being
out-of-date.
9
The English courts expressly separate the meaning of the two phrases by
stating,

To pierce the corporate veil is an expression that I would reserve for treating
the rights and liabilities or activities of a company as the rights or liabilities or
activities of its shareholders. To lift the corporate veil or look behind it, on the
other hand, should mean to have regard to the shareholding in a company for
some legal purpose.
10

The classic test for piercing the corporate veil was promulgated by Frederick J. Powell

according to which courts should pierce the corporate veil and impose personal liability
when: (1) there is a unity of interest between the corporation and its owners; (2) the
corporations actions are wrongful or fraudulent; and (3) the corporations creditors
suffer an unjust cost which warrants disregarding the corporate form. Besides, four
factors that courts have consistently considered in making a piercing determination
include: (1) fraud; (2) failure to adhere to corporate formalities; (3) inadequate
capitalization; (4) abuse of the corporate entity so as to amount to complete dominance
by the shareholders commonly referred to as alter ego or instrumentality factor.
11




6
Ian M Ramsay, David B Noakes, Piercing the Corporate Veil in Australia (2001) 2 Company and
Securities Law Journal 250.
7
H.K. Saharay, Company Law (5
th
edition, Universal Law Publishing Co., 2008) 12.
8
Brewarrana v Commissioner of Highways (1973) 4 SASR 476, 480 (Bray CJ); Walker v Hungerfords
(1987) 44 SASR 532, 559 (Bollen J).
9
Walker v Hungerfords (1987) 44 SASR 532, 559 (Bollen J).
10
Atlas Maritime Co SA v Avalon Maritime Ltd (No 1) [1991] 4 All ER 769.
11
Eric Fox, Piercing the Corporate Veil of Limited Liability Companies (1994) 62 Geo. Wash L. Rev.
1155.

2

Besides, courts have also considered, the failure to adhere to corporate formalities
which include duties to: (1) hold annual meetings; (2) elect directors and officers; (3)
maintain minutes and corporate records; and (4) issue stock certificates.
12



























































12
ibid 1162.

3

EMERGENCE AND PROVISIONS REGARDING THE DOCTRINE

The fundamental principle of separate legal entity of a company, independent legal
identity distinct from its members, can be assumed to be prevalent since the judgment
by Lord Macnaghten in Salomon v. A Salomon & Co Ltd
13
that a company is at law a
different person altogether from the subscribers to the memorandum. However, it was
soon realised and observed that some actions like fraud, dishonesty, misrepresentation,
etc. cannot be executed by corporations, they being artificial persons. Thus, in such
situations, the separate legal personality had to be removed by lifting the corporate
veil.
The apex court in Delhi Development Authority v. Skipper Construction Company Pvt.
Ltd.
14
observed as under:
The concept of corporate entity was evo lved to encourage and promote trade
and commerce but not to commit illegalities or to defraud people. Where,
therefore, the corporate character is employed for the purpose of committing
illegality or for defrauding others, the court would ignore the corporate
character and will look at the reality behind the corporate veil so as to enable it
to pass appropriate orders to do justice between the parties concerned. Even if a
person and his family members have created several corporate bodies, Court can
treat all of them as one entity belonging to and controlled by that person and
family if it is found that these corporate bodies are merely cloaks and the device
of incorporation was really a ploy adopted for committing illegalities and/or to
defraud people.
In Adams v. Cape Industries plc
15
, the veil was refused to be lifted on an English parent
company whose American subsidiary had been successfully sued by American litigants
but which had insufficient assets to satisfy judgement.
16
Slade LJ had said, ...save in
cases which turn on the wording of particular statutes or contracts, the court is not free




13
[1897] AC 22.
14
AIR 1996 SC 2005.
15
[1990] Ch 433.
16
Mike Griffiths, Lifting the Corporate Veil (2003) 44 Corporate Sector Review <
http://www2.accaglobal.com/archive/corpsecrev/44/895748> accessed 1 April 2012.


4

to disregard the principle of Salomon case
17
merely because it considers that justice so
requires. However, there have been numerous common law exceptions to the co ncept
of separate legal entity of a company through judicial decisions. There have been
instances of fraud by formation of a company to avoid pre-existing contractual
obligations.
18
In such circumstances, the corporate veil is lifted as done in the cases of
Gilford Motor Co Ltd v Home
19
, Jones v Lipman
20
. In various cases like Smith, Stone
and Knight Ltd v Birmingham Corporation
21
, the court treated a subsidiary company as
the agent of its holding company, going against the Salomon rule.
22
In this case, six
points were said to be considered to know who is actually carrying the business:
23

Were the profits treated as the profits of the company?

Were the persons conducting the business appointed by the parent company?

Was the company the head and the brain of the trading venture?

Did the company govern the adventure; decide what should be done and what
capital should be embarked on the venture?
Did the company make the profits by its skill and direction?

Was the company in effectual and constant control?

There are various other situations in which this doctrine may be applied. Corporate veil
may be lifted to verify if a decision taken in a company meeting was on behalf of all the
members.
24
The veil may also be lifted to determine a companys nationality by
reference to the nationality of the members of the company as done in Re FG Films
Ltd
25
.
26
Keeping in mind public interest at large, corporate veil is also lifted at times
like in case of Daimler Co Ltd v Continental Tyre & Rubber Co. (GB) Ltd.
27
where the





17
Salomon v A. Salomon and Co. Ltd (1897) AC 22 (HL).
18
Alan Dickman, Hicks & Goos Cases and Materials on Company Law (7
th
edition, Oxford University
Press, 2008) 106.
19
[1933] Ch 935 (Court of Appeal).
20
[1962] 1 All ER 442.
21
[1939] 4 All ER 116.
22
Nicholas Bourne, Bourne on Company Law (4
th
edition, Routledge-Cavendish, 2007) 19.
23
Susan Barber(ed), Company Law (3
rd
edition, Old Bailey Press, 2001) 15.
24
Re Express Engineering Works Ltd [1920] 1 Ch 466 (CA).
25
(1953) 1 All ER 615.
26
Nicholas Bourne, Bourne on Company Law (4
th
edition, Routledge-Cavendish, 2007) 23.
27
[1916] 2 AC 307.

5

House of Lords decided that the company, although it was incorporated in England,
was an enemy alien as all of its shareholders were German.
28

In the case of Trustor AB v Smallbone
29
, where Mr Smallbone had transferred money

from Barclays Bank to himself and a company owned by him, the judge held that:


In my judgment the court is entitled to pierce the corporate veil and recognise
the receipt of the company as that of the individual(s) in control of it if the
company was used as a device or faade to conceal the true facts thereby
avoiding or concealing any liability of those individual(s).

Taking into account the provisions regarding this doctrine in the various countries is not
the same. Considering Belgium in the first instance, Article 2 of Belgium Company
Code states that commercial companies with limited liability have a legal personality
different from the personality of their shareholders while Article 61 of the Company
Code further provides that directors are not personally liable for the debts of the
company; in Belgium, piercing can be carried out voluntarily
30
as well as
involuntarily.
31
Judicial piercing is mainly applied in cases of consistent abuse
32
of

Belgian companys legal personality.

In the case of Germany, a first part of shareholder liability is regulated in the
German Konzernricht which is not, however, limited to the rules laid down in the law
on stock companies (Aktiengesetz) whose rules have been supplemented and extended
by the courts.
33
A second part of shareholder liability in Germany consists of other
grounds for veil piercing, whether based on legal rules outside group law or on theories
developed by the courts that bear no relationship to the Konzernricht.
34




28
Susan Barber(ed), Company Law (3
rd
edition, Old Bailey Press, 2001) 18.
29
[2001] 1 WLR 1177.
30
In voluntary piercing, the corporate veil is lifted at the request or for the benefit of the shareholders of
the company. This kind of piercing is accepted under Belgian Law when it can be demonstrated that the
shareholder has a personal interest in rendering certain commitments of its company possible by securing
them vis--vis third parties.
31
Karen Vandekerckhove, Piercing the Corporate Veil (1
st
edition, Kluwer Law International, 2007) 29.
32
Abuse is deemed to occur when the assets and activities of the company are confused with these of its
shareholders such that it appears that the company was used as a company as a mere cover for the
shareholders own activities.
33
Karen Vandekerckhove, Piercing the Corporate Veil (1
st
edition, Kluwer Law International, 2007) 46.
34
ibid.

6

In the case of India, we have a number of judicial decisions besides numerous statutory
provisions that enable lifting of the corporate veil. Some of the provisions in the
Companies Act, 1956 are given in Sections 45, 62 and 63, 69, 113, 147, 212, 239, 247,
542 etc.
35
Some of the prominent cases include Sir Dinshaw Maneckji Petit, Re
36
where

the veil was lifted and it was held that the company was formed by the assessee, purely
and simply as a means of avoiding tax and company was nothing more than the
assessee himself.
37
In State of U.P. v Renusagar Power Co.
38
, Supreme Court held that
where the holding company holds 100% shares in a subsidiary company, created only
for the purpose of the holding company, the corporate veil can be lifted.
39

Depending on the situation, the veil can be peeped behind, penetrated, extended or
ignored, which is done in the most extreme cases.
40
Prof. S. Ottolenghi characterized
judicial action in corporate veil cases to be of four types:


1. Peeping behind the veil: In this case, the veil is lifted only to know who has
control over the company, such as who are the shareholders, what is the
proportion of their holdings, and what is their inter-relationship regarding the
control of the company.
41
After getting to know all this, the veil is pulled down
and once more the company is treated as a separate legal personality, to which
special characteristics are now attributed in consequence of that curiosity; this
helps to ascertain classification of the company into a holding company, a
wholly owned subsidiary or an associated company etc.
42

2. Penetrating the veil: The purpose behind this is to impose responsibility upon
the shareholders for the company's acts or to establish their direct interest in the




35
A.K. Majumdar and G.K. Kapoor, Taxmanns Company Law Practice (16
th
edition, Taxman
Publications P. Ltd, 2011) 20.
36
AIR 1927 Bom. 371.
37
A.K. Majumdar and G.K. Kapoor, Taxmanns Company Law Practice (16
th
edition, Taxman
Publications P. Ltd, 2011) 20.
38
[1991] 70 Comp. Cas. 127.
39
A.K. Majumdar and G.K. Kapoor, Taxmanns Company Law Practice (16
th
edition, Taxman
Publications P. Ltd. 2011) 21.
40
S. Ottolenghi, From Peeping Behind the Veil to Ignoring it Completely (1990) 53 The Modern Law
Review 338.
41
ibid 340.
42
ibid.

7

companys assets or to make them liable for the acts of the company. The courts
penetrate the veil and grasp the controlling shareholders personally.
43



3. Extending the veil: lifting the veil over one company and then pulling it down to
include another entity in the same veil. This is the approach in both single
economic entity and factual-agency arguments. In this case, the veil is
extended so that it embraces a bunch of companies. This is done when a group
of legal entities conducts a common activity, so that instead of individualistic
reference, all of them can be regarded as a single going concern, under one
extended veil of incorporation.
44




4. Ignoring the veil: This forms the most extreme form of lifting the veil. Courts
ignore the veil completely when they think that the company was not founded
for commercial or other sound grounds, but only as a means to defraud or defeat
creditors or to get out of laws.
45
Words like cloak, instrumentality, sham,
scheme, puppet or bubble company describe a company which is not
genuine.
46

























43
ibid 343.
44
ibid 347.
45
ibid 351.
46
See, In re Carl Hirth, exp Trustee [1899] 1 QB 612 as cited in S. Ottolenghi, From Peeping Behind
the Veil to Ignoring it Completely (1990) 53 The Modern Law Review 338, 351.

8

THE RELEVANCE TODAY


Over the years this doctrine has gained sufficient importance and usage. With
increasing issues related to companies, the significance of this doctrine has evolved
over the years. With the increasing mergers and acquisitions, and more risks of attempts
towards tax evasions, they form the most prominent of these issues, while the others
include demand for public interest
47
, cases of fraud
48
, improper conduct
49
and violation
of statutory obligations
50
etc. which have been already mentioned previously.

Besides, not only has this doctrine been used for fixing liability on shareholders but
also to relieve from liability as laid down in the recent case of Premlata Bhatia v Union
of India
51
. Similarly, in the court suggested lifting of the corporate veil to find out who
are the persons playing behind the curtain. This is an example of reverse piercing,
which may be called as voluntary piercing. Reverse piercing of the corporate veil refers
to an attempt initiated by shareholders, or the corporation itself, to pierce the
corporate veil existing between the corporation and its shareholders.
52
In the usual
piercing situation, forward piercing is done, in which the shareholders are held liable
for the corporations debts.
53
The claim is involuntary in that it is filed by a creditor or
corporate outsider, and the shareholders are subject to liability against their will.
54

This doctrine has also witnessed application in the case of J.B. Exports v BSES
Rajdhani Power Ltd
55
where sub-letting charges were not paid by the company whose
shares were acquired by another company, as both appeared to be the same entity,
which was realised after lifting the corporate veil.




47
Daimler Co Ltd v Continental Tyre & Rubber Co. (GB) Ltd. [1916] 2 AC 307.
48
Jones v Lipman [1962] 1 All ER 442.
49
Gilford Motor Co Ltd v Home [1933] Ch 935 (Court of Appeal).
50
LIC v Escorts (1986) 1 SCC 264.
51
[2006] 71 SCL 142 (Delhi).
52
See William. M. Fletcher, Cyclopedia of The Law Of Private Corporations (3
rd
edition,
Thomson/West, 1988) 41.70 as cited in Michael J. Gaertner, Reverse Piercing The Corporate Veil:
Should Corporation Owners Have It Both Ways? (1989) 30 William & Mary L. Rev. 667.
53
Elham Youabian, Reverse Piercing of the Corporate Veil: The Implications of Bypassing
Ownership Interest (2004) 33 Sw. U. L. Rev. 573, 577 as cited in Thomas K. Cheng, The Corporate
Veil Doctrine Revisited: A Comparative Study of the English and the U.S. Corporate Veil Doctrines
(2011) 34 Boston College International & Comparative Law Review 329, 372.
54
ibid.
55
[2007] 73 SCL 133 (Delhi).

9

In a current case of Kotak Mahindra Bank Limited v Subhiksha Trading Services
Limited
56
, Kotak Mahindra Bank seeking winding up of Subhiksha after it failed to
repay a loan of Rs 35 crore with interest, under the provisions of Company's Act 1956,
after Subhiksha failed to prove how it suffered losses of Rs 800 crores due to the global
financial crunch, Kotak's counsel, Mr H. Karthik Seshadri, submitted that, the conduct
of Mr R. Subramanian (Managing Director of Subhiksha) required a detailed
investigation by lifting the corporate veil as there was an apprehension that he has
wilfully transferred the company's assets to entities such as Cash and Carry
Wholesale Traders Pvt. Ltd., Custodial Services India, Pentagon Trading Services,
Shevaroy Holiday Resorts and Triad Trading Services, which are controlled by Mr
Subramanian along with a few others.
57


In another recent case
58
, a company by the name, Shri Lal Mahal Ltd. (formerly known
as Shivnath Rai Harnarain (India) Company Ltd.) was incorporated by three people
with the purported object of taking over the business, assets and liabilities of another; it
was created only with a view to defeating the award and consequently the decree
under execution by the decree holder.
The landmark case of Vodafone International Holdings BV v Union of India
59
was a

reconciliation of the cases of Commissioner of Inland Revenue v His Grace the Duke of
Westminster
60
and WT Ramsay v Inland Revenue Commissioner
61
which concluded that
if the taxpayer has used colourable devices or resorted to dubious methods to minimize
tax then the revenue authorities have every right to lift the corporate veil. India's tax
authorities had raised a $2.2-billion bill on Vodafone, British mobile company after
Hutchison, a joint venture in India with Essar sold the shares of a foreign company,
Cayman Islands Co. to Vodafone, on the ground that the company had to pay capital





56
(Madras High Court 29 February 2012).
57
R. Ravikumar, Subhiksha has failed to prove how it suffered huge losses: Court Business Line,
(Chennai, 6 March 2012) <http://www.thehindubusinessline.com/industry-and-
economy/article2967485.ece> accessed 7 March 2012.
58
Glencore Grain Rotterdam B. V. v Shivnath Rai Harnarain (India) Company, (Delhi High Court, 6
February 2012).
59
(Supreme Court, 20 January 2012).
60
(1935) All ER 259 [HL].
61
(1981) 1 All ER 865.

10

gains tax as the deal-making involved an Indian asset.
62
Finally, on appeal, the Supreme
Court ruled in Vodafone's favour, interpreting law as it is today, concluding that the
income-tax law does not use the word 'indirect transfers' and, hence, cannot be
interpreted to cover such transfers of capital assets or property situated in India.
63

In paragraph 66 of the Vodafone case, the Chief Justice suggested lifting of the
corporate veil wherever and whenever possible. He affirmed that a subsidiary and its
parent are totally distinct taxpayers
64
and that would hold good even if a parent
exercises substantial control over the affairs of its subsidiary. Further in paragraph 67,
he gives exceptions in cases where the decision-making is fully subordinate to the
holding company or if the parent company makes an indirect transfer through abuse
of legal form and without reasonable business purpose.
65

Even Sudhir Chandra, Former Chairman, Central Board of Direct Taxes, agreed that
Vodafones case was classically the right case for lifting the corporate veil,
66
for
levying taxes. As a response to the Vodafone case, various retrospective amendments in
the Finance Bill, 2012 were triggered, to handle taxation of international transactions
associated with Indian assets. It had given rise to such a situation that a retrospective
amendment is indispensable and fair in such a situation.
If a company has done legitimate tax planning, it is unjust to hold it illegitimate or
illegal or impermissible merely because tax is minimized, further, it has been held that
where the taxpayer has arranged its affairs through the use of colourable device or by
resorting to dubious methods and subterfuges to minimize tax then the revenue
authorities have every right to lift the corporate veil.
67







62
Hema Ramakrishnan, Post Vodafone verdict, India should spearhead debate on tax laws The
Economic Times (26 January 2012) <http://articles.economictimes.indiatimes.com/2012-01-
26/news/30666661_1_tax-laws-avoidance-capital-gains-tax> accessed 30 January 2012.
63
ibid.
64
(Supreme Court, 20 January 2012).
65
ibid.
66
Sudhir Chandra, Is it fair to frame tax laws on overseas buys of Indian assets retrospectively?
Business Standard (21 March 2012) < http://www.business-standard.com/india/news/is-it-fair-to-frame-
tax-lawsoverseas-buysindian-assets-retrospectively/468419/> accessed 7 April 2012.
67
This conclusion was reached after the successful reconciliation of the earlier Supreme Court decisions
in Commissioner of Inland Revenue v His Grace the Duke of Westminster, 1935 All ER 259 and WT
Ramsay v. Inland Revenue Commissioner (1981) 1 All ER 865.

11

In another recent example where corporate veil was lifted was Richter Holdings Ltd. v
The Assistant Director of Income Tax
68
, where High Court had directed tax authorities
to lift the corporate veil to ascertain the substance of a transaction in case there is any
potential tax evasion. Further, it was laid down that:

It may be necessary for the fact finding authority to lift the corporate veil to
look into the real nature of transaction to ascertain virtual facts. It is also to be
ascertained whether petitioner, as a majority share holder, enjoys the power by
way of interest and capital gains in the assets of the company and whether
transfer of shares in the case on hand includes indirect transfer of assets and
interest in the company.
69



However, in Pankaj Aluminium Industries Private Limited v Bharat Aluminium
Company Limited
70
, corporate veil was not lifted
71
as the petitioner and its group
companies had been representing themselves to be a single economic entity all that
time and the Memorandums of Understanding clearly showed execution between the
respondent and the petitioner with other group companies on the other.
The recent cases of Antonio Gramsci Shipping Corp v Stepanovs
72
and VTB Capital plc
v Nutritek International Corp
73
have created a change in the application of the doctrine
of lifting the corporate veil in United Kingdom. In VTB Capital Plc v Nutritek
International Corp
74
the claimant alleged a fraud by the defendants. VTB had entered
into a loan agreement with RAP for the acquisition of nine companies from Nutritek.
When RAP failed to pay the loan, VTB alleged that Nutritek had made fraudulent
misrepresentations in order to induce VTB to enter into the loan agreement. The fourth
defendant was a Russian citizen, living in Moscow, who was alleged to be the principal
beneficial owner and controller of both Nutritek and RAP. VTB wanted to pierce the
corporate veil to hold each of the other defendants jointly and severally liable with RAP

68
(High Court of Karnataka, 24 March 2011).
69
Richter Holdings Ltd v The Assistant Director of Income Tax, (High Court of Karnataka. 24 March
2011).
70
(Delhi High Court, 23 March 2011).
71
Kopran Limited v Commissioner of Central Excise, Raigad, (Customs Excise and Service Tax
Appellate Tribunal, West Zonal Bench, Mumbai (Court no. 1), 1 March 2011).
72
[2011] EWHC 333 (Comm).
73
[2011] EWHC 3107 (Ch).
74
[2011] EWHC 3107 (Ch).

12

for the default made on the loan
75
and were of the opinion that piercing the corporate
veil is a 'convenient label which is used to identify cases in which the courts have
granted relief which involves, or perhaps more accurately appears at first blush to
involve'. In this case, it was found that:

It was inappropriate to allow the doctrine to be used to make a contractual
claim against the controller of a company in respect of his or her wrongdoing,
primarily because it was fundamentally inconsistent with a fraud allegation to
claim damages for breach of contract. The company would be jointly liable
where the wrongdoer concealed his or her involvement, but not when he or she
did not do so, for example, where the wrongdoer was a duly appointed director
of the company. The important issue was whether the company was being used
as a sham at the time of the relevant transaction, rather than the purpose for
which the company was established. He also cited with approval the view
in Dadourian
76
case that piercing the corporate veil would occur only to provide

the claimant with an effective remedy where the interposition of the sham
company would, if successful, deprive the claimant of that remedy. Therefore,
leave to amend the particulars of claim was denied.
77


In this case, much stress was given to circumstances based on which the veil can be
lifted unlike in case of Antonio Gramsci Shipping Corp v Stepanovs
78
where Burton J
held that the corporate veil could be pierced, and a claim for damages made, if the
conditions in Trustor v Smallbone
79
were satisfied which are: fraudulent misuse of the
company structure, and a wrongdoing committed 'dehors' the company. In the VTB






75
Abigail Silver, Piercing the corporate veil - is it enough to pull the strings?International Law Office
(20 March 2012) <http://www.internationallawoffice.com/newsletters/Detail.aspx?g=43d497ce-48bf-
4e12-ab06-06a7ac7ba371> accessed 21 March 2012.
76
Dadourian Group International Inc v Simms [2006] EWHC 2973 (Ch).
77
Abigail Silver, Piercing the corporate veil - is it enough to pull the strings?International Law Office
(20 March 2012) <http://www.internationallawoffice.com/newsletters/Detail.aspx?g=43d497ce-48bf-
4e12-ab06-06a7ac7ba371> accessed 21 March 2012.
78
[2011] EWHC 333 (Comm).
79
[2001] WLR 1177.

13

case, Arnold J laid believed lifting the corporate veil to be 'inappropriate', to enable
a contractual claim against a person who is the controller of a company.
80


In the case of Trustor AB v Smallbone
81
, where Mr Smallbone had transferred money
from Barclays Bank to himself and a company owned by him, the judge held that:


In my judgment the court is entitled to 'pierce the corporate veil' and recognise
the receipt of the company as that of the individual(s) in control of it if the
company was used as a device or faade to conceal the true facts thereby
avoiding or concealing any liability of those individual(s).











































80
[2011] EWHC 3107 (Ch).
81
[2001] 1 WLR 1177.

14

SOME CRITICISMS AND FUTURE ASPECTS OF THE DOCTRINE


In the early 1960s and 1970s this concept of lifting the corporate veil had gained
sufficient attention which gradually decreased after DHN Food Distributors Ltd v
Tower Hamlets London Borough Council
82
and the trend returned to the Salomon
case
83
.
84
In the case of Dimbley & Sons Ltd v National Union of Journalists
85
, it was

decided that in absence of required clear language of treating separate legal entities as a
single entity for the purposes of the Employment Act 1980, the court would not engage
in veil lifting.
86
Later, in Ord & Anor v Belhaven Pubs Ltd
87
, it was found that original
company had not been a mere faade for the holding company, nor vice versa, besides,
the company had not been created as a sham to avoid some liability, thus, there had
been no element of asset stripping and so the veil should not be lifted.

There has been no stagnant or consistent application of the lifting of the corporate veil
yet. Herron CJ, in Commissioner of Land Tax v Theosophical Foundation Pty Ltd
88
,
described lifting the corporate veil as an esoteric label
89
and further added that:


Authorities in which the veil of incorporation has been lifted have not been of
such consistency that any principle can be adduced. The cases merely provide
instances in which courts have on the facts refused to be bound by the form or
fact of incorporation when justice requires the substance or reality to be
investigated
90









82
[1976] 1 WLR 852 (Court of Appeal).
83
Salomon v A. Salomon and Co. Ltd (1897) AC 22 (HL).
84
Sarah Worthington, Sealys Cases and Materials in Company Law (9
th
Edition, Oxford University
Press, 2010) 66.
85
[1984] 1 All ER 751.
86
Alan Dickman, Hicks & Goos Cases and Materials on Company Law (7
th
edition, Oxford University
Press, 2008) 113.
87
[1998] BCC 607.
88
(1966) 67 SR (NSW) 70.
89
(1966) 67 SR (NSW) 75.
90
(1966) 67 SR (NSW) 75 as cited in Ian M Ramsay and David B Noakes, Piercing the Corporate Veil
in Australia (2001) 19 Company and Securities Law Journal 253.

15

The concept of piercing the corporate veil has been described as incoherent and
unprincipled by some.
91
I personally feel the same, owing the fact that there is no strict
scope for its applicability. Thus, it depends on the judges concerned; consequently they
exercise strong discretion in such cases. Besides, there is lack of predictability. Often
courts are misguided or without guidance, deliver judgments which subject business
owners to ruinous liabilities because the corporation did not observe irrelevant
procedures enacted only to protect shareholders or because owners exercised control
over corporations commensurate with their ownership interest.
92
Lord Devlin rightly
noted that:


The legislature can forge a sledgehammer capable of cracking open the
corporate shell; and it can, if it chooses, demand that the courts ignore all the
conceptions and principles which are at the root of company law.
93


In order to determine the real purpose and scheme, Court, if necessary, can pierce
the veil of apparent corporate purpose underlying the scheme and can judiciously X-ray
the same, as laid down in Miheer H. Mafatlal v Mafatlal Industries Ltd.,
94
and later
mentioned in Sesa Industries Limited v Krishna H. Bajaj and others
95
and In Re:

Flextronics Technologies (India) Private Limited, Represented by its authorized
signatory, Ashok Dhawan.
96
The rule of veil piercing has been called vague and
illusionary
97
and the actual judicial application of the standards has been analogized to
rare, severe, and unprincipled.
98





91
J Farrar, Fraud, Fairness and Piercing the Corporate Veil (1990) 16 Canadian Business Law Journal
474, 478.
92
John H. Matheson and Raymond B. Eby, The Doctrine of Piercing the Corporate Veil in an Era of
Multiple Limited Liability Entitles: An Opportunity to Codify the Test for Waiving Owners Limited
Liability Protection (2000) 75 Wash. L. Rev. 150.
93
Bank voor Handel en Scheepvaart N.V. v Slatford [1953] 1 QB 278 as cited in William W. Park,
Fiscal Jurisdiction and Accrual Basis Taxation: Lifting the Corporate Veil to Tax Foreign Company
Profits (1978) 78 Columbia Law Review 1661.
94
Miheer H. Mafatlal v Mafatlal Industries Ltd. (1997) 1 SCC 579.
95
(Supreme Court of India, 7 February 2011).
96
(Madras High Court, 16 December 2010).
97
Frank H. Eastercook and Daniel R. Fischel, Limited Liability and the Corporation (1985) 52
U.Chi.L.Rev 89 as cited in Jeffery K. Vandervoot, Piercing the veil of Limited Liability Companies:
The Need for a Better Standard (2004) 3 DePaul Business and Commercial law Journal 51, 81.
98
ibid.

16

Windeyer J, in Gorton v Federal Commissioner of Taxation
99
, stated that this approach
had led the law into unreality and formalism.
100
It has been observed by many that
the fundamental problem with the decision in Salomon
101
case is not the principle of
separate legal entity, but that the House of Lords gave no indication of: What the
courts should consider in applying the separate legal entity concept and the
circumstances in which one should refuse to enforce contracts associated with the
corporate structure.
102


The concept of corporate entity was evolved to encourage and promote trade and
commerce but such entities are misused to commit illegalities or to defraud people;
wherein corporate veil is lifted to look at reality behind the veil by ignoring the
corporate character.
103
But the usage of the concept is poses issues in the present world
as it is not any open sesame.
104
The standard justification for veil piercing argues that

it serves as a safety valve allowing courts to address cases in which the externalities
associated with limited liability seem excessive.
105
Alternatives for corporate veil
piercing can be sought especially in cases like those of tax evasion. But before this, tax
planning ought to be distinguished from tax evasion. Even before lifting the corporate
veil, if done so, the distinction must be clarifies as the separate corporate entity will be
disregarded only where it serves as a shield for tax evasion. The Government, naturally
enough, will not prefer schemes due to which it would have to suffer because of tax
avoidance or evasion.
106

Furthermore, such revenue leakages can be avoided by incorporation of General Anti-

tax Avoidance Rules (GAAR), which was considered as an option for which tax office


99
(1965) 113 CLR 604 as cited in Ian M Ramsay, David B Noakes, Piercing the Corporate Veil in
Australia (2001) 2 Company and Securities Law Journal 250.
100
(1965) 113 CLR 627.
101
Salomon v A. Salomon and Co. Ltd (1897) AC 22 (HL).
102
M Whincop, Overcoming Corporate Law: Instrumentalism, Pragmatism and the Separate Legal
Entity Concept (1997) 15 Company and Securities Law Journal 411, 420 as cited in Ian M Ramsay,
David B Noakes, Piercing the Corporate Veil in Australia (2001) 2 Company and Securities Law
Journal 250.
103
Rasila S. Mehta v Custodian, Nariman Bhavan, Mumbai, (Supreme Court of India, 6 May 2011).
104
I. Maurice Wormser, Piercing the Veil of Corporate Entity (1912) 12 Columbia L. Rev. 496.
105
William L. Cary and Melvin Aron Eisenberg, Cases and Materials on Corporations (7
th
edition,
Foundation Press, 1995) 191 as cited in Stephen M. Brainbridge, Abolishing LLC Veil Piercing (2005)
University Of Illinois Law Review, 77.
106
Robert R Pennington, Penningtons Company Law (8
th
edition, Oxford University Press, 2006) 43.

17

has to first establish that a holding structure has been set up for a sham transaction, and
then lift the corporate veil to take a close look at the deal.
107
Another option can be
introduction of "accrual basis" tax regimes that disregard the company's separate legal
personality for the purpose of taxing shareholders on company income before it is
distributed as a dividend; under such tax regimes the accrual of profits to a corporation,
rather than their distribution as a dividend, triggers imposition of an income tax on
some or all of its shareholders.
108














































107
Hema Ramakrishnan, Post Vodafone verdict, India should spearhead debate on tax laws The
Economic Times (26 January 2012) <http://articles.economictimes.indiatimes.com/2012-01-
26/news/30666661_1_tax-laws-avoidance-capital-gains-tax> accessed 30 January 2012.
108
William W. Park, Fiscal Jurisdiction an Accrual Basis Taxation: Lifting the Corporate Veil to Tax
Foreign Company Profits (1978) 78 Columbia Law Review 1611.

18

CONCLUSION
In Cotton Corporation of India Ltd. v G.C. Odusumathd
109
the Karnataka High Court
had held that the doctrine of lifting of the corporate veil of a company as a rule is not
permissible in law unless otherwise provided in clear words of the statute or by very
compelling reasons such as where fraud is needed to be prevented or trading with
enemy company is sought to be defeated.
110

Some of the basic instances in which the veil would be lifted are: in time of war, to

determine the enemy character of the company; in cases where the company was
formed for a fraudulent purpose; as between a holding company and its subsidiaries;
and in revenue cases.
111
The veil can be pierced when the policies behind the
presumption of corporate independence and limited liability are outweighed by policy
justifications for disregarding the corporate form.
112

Separate legal personality is one of the most significant features of a company which
ought not to be taken away but for exceptional cases. The veil of incorporation should
be lifted where the company is a faade concealing the true facts
113
or where two
companies were used as a cloak for fraudulent and criminal liability.
114
It is certainly
true and established that this doctrines relevance has increased today with the increase
in complications with regards to companies. It is true that company, having certain
rights and duties, is a legal person. However, attributing legal capacities to a company
is different from treating it as having human characteristics.
115

This rule of veil lifting has to be used scrupulously and efficiently, wherever required,

so that it is used in the best possible way.







109
[1999] 22 SCL 228.
110
A.K. Majumdar and G.K. Kapoor, Taxmanns Company Law Practice (16
th
edition, Taxman
Publications P. Ltd. 2011) 19.
111
Northey & Leigh, Introduction to Company Law (4
th
edition, Lexis Nexis, 1987) 20.
112
SB Presser, Thwarting the killing of the Corporation: Limited Liability, Democracy and Economics,
87 Nw. U. L. Rev. 155 as cited in Stephen M. Brainbridge, Abolishing LLC Veil Piercing (2005)
University Of Illinois Law Review 77, 94.
113
Trustor AB v Smallbone [2001] 2 BCLC 436 (Chancery Division).
114
H and Others (Restraint Order: Realisation Property), Re [1996] 2 All ER 391 (Court of Appeal
(Civil Division)).
115
Collins Steward Ltd. v Financial Times Ltd. [2005] EWHC 262 (QB).

19

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