LIFTING/ PIERCING OF THE CORPORATE VEIL Shajeeda Tajdeen BASICS OF LAW Wed, Nov 06, 2019, at ,05:46 AM A company is a separate legal entity that is distinct from its members. This principle is also referred to as ‘the veil of incorporation.’ The effect of this principle is that there is a fictional veil (and not a wall) between the company and its members. A company is an artificial person and thus it cannot act on its own and it needs natural persons to conduct its business. Precisely, a company can act through and with the help of natural persons (human beings). However, humans through their art of creativity and mastery started misusing this advantage of separate legal entities. The concept of the veil of corporate personality was blatantly used as a cloak for fraud or improper conduct. Thus, it became necessary for the courts to break through or lift the corporate veil or crack the shell of corporate personality and look at the person's behind the company who are the real beneficiaries of the corporate fiction. Professor Grower, has analyzed the principle of lifting the corporal veil and according to him, ‘there are cases where the court has looked behind the façade of the company and its place of registration in order to determine its residence and for this purpose, the test laid down is the place of central management and control. Similarly, the court has looked at the corporators, in order to determine the true character of the corporation as an alien enemy or as a foreign resident.’ He also stated that this test in no case breaches the principle laid down in the Salomon v/s Salomon case. The Corporate veil of a company can be lifted in the following situations: Determination of the character of a company whether it is an alien enemy? Protection of revenue. Prevention of fraud or improper conduct. Where the company is a sham? The company is avoiding legal obligations. The company acting as an agent or trustee of the shareholders. Avoidance of welfare legislation. Protecting public policy. Central Inland Water Transport Corporation Ltd. v/s Brojo Nath Ganguli. Fact- The question about the position of the company whether it was an agency or instrumentality of the State for the purpose of Article 12 of the Constitution of India. Held- The Supreme Court held that for the purpose of Article 12, one must necessarily see through the corporate veil to ascertain whether behind that veil is the face of an instrumentality of or agency of the State. Daimler Co. Ltd v/s Continental Tyres & Rubber Co. Fact- The company incorporated in England for the purpose of selling tires manufactured in Germany by a German company. All the shares except one share held by a British subject who was the secretary of the company. The real control of the English company was in German hands. During World War-I, the company commenced an action to recover trade debts. The question, therefore, was whether the company had become an enemy company consequent to World War I. Held- The Lordship, therefore, held that the company was an enemy company for the purpose of trading and therefore it was barred from maintaining the action. Re Sir Dinshaw Manekjee Petit. Fact- The assessee was a wealthy man enjoying huge income from dividends and interests. He formed four private companies and agreed with each to hold a block of investments as an agent for it. He credited the income received by him in the accounts of the companies and took it back in the form of a pretended loan. The whole idea was to split the income into four parts so as to evade taxes. Held- The Supreme Court held that the company of the assessee was purely and simply formed to evade taxes. Gilford Motor Co. v/s Horne. Fact- Mr. Horne was appointed as a Managing Director of the plaintiff’s company on the condition that he shall not at any time while he holds the office of a managing director or afterward, solicitor entice the customers of the company. Horne’s employment was terminated under an agreement. Thereafter he started a new company to carry on the business solicitation and solicited the plaintiff’s customers. Held- The Court held that the defendant company was a were a cloak or a sham and channel used by the defendant (Horne) to obtain advantages of the customers of the plaintiff company for his own benefit and therefore it ought to be restrained from carrying on the business. Jones v/s Lipman. Fact- The defendant (Lipman) with the sole purpose of escaping a decree of specific performance to convey a house to Jones to whom he had contracted to sell it for 5250 pounds, sold and transferred the house to a company which he had incorporated with a nominal capital of 100 pounds. Held- The Court held that the company was a mask and Lipman cannot escape from his liability. The Court, therefore, passed an order for specific performance against both, Lipman and the company to compel the conveyance of the house to the plaintiff.