Introduction to Corporate Veil
The term lifting the corporate veil has been defined as “looking behind the company as a legal person, that is, disregarding the corporate entity and paying regard, instead, to the realities behind the legal façade.” The concept of the corporate veil is still evolving and has been recognized by the judiciary and its various judgments, though it does not have any statutory recognition. It curbs the scope of misusing the garb of a corporate personality.
Corporate Personality and Corporate Veil
A corporation is a legal entity distinct from its members. A corporation has a separate “legal personality” from its owners and is often described as an artificial person in contrast with a human being, a natural. It can sue or be sued, take a loan in its own name, enter into contracts, and do everything that a natural person can do in the legal and corporate world. In other words, it can be said that the owners of a company would not be held personally liable for the actions of the company, however, there are exceptions to it which have evolved over time by the concept of the lifting of the corporate veil.
The concept of separate corporate personality has been firmly established in Salomon v. Salomon & Co. Ltd. in the common law. It was established that a corporation has a separate legal personality, rights, and liabilities distinct from its owners or shareholders. This principle may result in its misuse, thus the concept of the lifting of the corporate veil curbs the misuse of the doctrine of separate legal entity.
The court in Woolfson v. Strathclyde Regional Council said that the piercing of the corporate veil is appropriate in special circumstances where the corporation is a mere façade concealing the true facts. If a company follows proper laws and makes honest use of the company – it is clothed with a legal personality. But if an entity dishonestly and fraudulently uses the doctrine of the separate legal entity, then the court lifts the corporate veil in order to identify the individual persons who are behind the façade of a company involved in the fraud. This comes as an exception to the concept of a separate legal entity where the owners are held personally liable.
The concept of the corporate veil is changing and evolving over time. In modern jurisprudence, the lifting of the corporate veil is permissible and the instances in which it can be lifted may vary from case to case and is not fixed. The court will lift the corporate veil or ignore it to get to the person behind the veil in order to reveal the true form and character of the concerned company.
Instances in which the Corporate Veil can be Lifted
The corporate veil can be lifted in the following instances, but this is not an exhaustive list:
- Where the company is merely acting as an agent of the members
- To defraud the creditors
- Against public policy and welfare legislation
- To circumvent the law
- Where the subsidiary is acting as an agent of the holding company, but in reality, they are two separate entities.
Some Case in which it was Lifted by the Court
- Merchandise Transport Ltd. v. British Transport Commissioner: In this case, a company involved in the transport business wanted to obtain licenses for its vehicles. Since it was not entitled to apply for licenses in its own name, it formed a subsidiary company and applied for licenses with the intention that these licenses will be transferred to the parent company. The court held that the subsidiary was a sham company, and in reality, the subsidiary and the parent company were acting as one unit. The subsidiary was formed to obtain an unfair advantage for the parent company which was not available otherwise. Thus, the corporate veil was lifted by the court.
- Apthorpe v. Peter Schoenhofen Brewing Co. Ltd.: In New York, foreigners were not allowed to hold land. An English company acquired an American company to avoid legal complications and taxes and continued its American name whereas in reality the whole company was being run by the English company as all shares except 3 were held by the English company. The corporate veil was lifted by the court on the ground that the American company was acting as an agent of the English company thus, the profits of the American company were taxed as the income of the English company.
- Official Liquidator v. Bagri Brothers Ltd.: In order to avoid paying debts to his creditors, a trader converted his sole proprietorship into a public company and transferred all his assets to the company. He himself and his wife were the directors of the company. After the incorporation of the company, he declared himself insolvent. The court held that the true form and purpose of the company have to be assessed in order to lift the corporate veil. The corporate veil was lifted on the ground that he was trying to defraud his creditors.
- Workmen v. Associated Rubber Industry Ltd.: The company in order to avoid paying bonuses to its workers, created a subsidiary and transferred all its investments to it. The subsidiary company had no business or assets, or income of its own except for the investments transferred by the parent company. The Apex court lifted the corporate veil setting aside the independent existence of the subsidiary company. It was held that the subsidiary was merely a sham and acting as the agent of the parent company. The corporate veil was lifted on the grounds that the ground that the subsidiary company was formed in order to avoid welfare legislation.
- In Re Dinshaw Maneckjee Petit: Dinshaw Maneckjee formed four private companies to hold his particular blocks of investment and held the investments as a trustee by executing a Trust Deed in his own name. He received interest and dividends as a trustee of the investments. All the shares except 3 were held by him while the remaining 3 shares were held by his subordinates over whom he had complete control. The companies had no business except receiving dividends and lending that to Dinshaw with interest while no interest was paid in reality. It was actually his profits that he was avoiding being taxed by showing his income as a loan. The court held that the company was formed to circumvent the law and was not genuine, thus, the corporate veil was lifted.
The concept of the lifting of the corporate veil is evolving and the instances in which it can be lifted are not fixed. It depends on a case-to-case basis. The court while lifting the corporate veil is required to assess the true form and character of the concerned company, and where such form and character are found to be a mere sham, then the corporate veil can be lifted. There are many other judgments in which the corporate veil was lifted on various grounds. There is a need to statutorily incorporate the concept of the lifting of the corporate veil in order to bring consistency and uniformity to the law.