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Electronic copy available at: http://ssrn.com/abstract=2352489

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 veilwas 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out-of-date.9 The English courts expressly separate the meaning of the two phrases by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 treatingthe 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 egoor 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 (5th 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).10Atlas 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.

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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.

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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 inDelhi 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.

InAdams v. Cape Industries plc15, 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 433.16Mike Griffiths, Lifting the Corporate Veil (2003) 44 Corporate Sector Review accessed 1 April 2012.

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to disregard the principle of Salomon case17 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 Home19, Jones v Lipman20. In various cases like Smith, Stone

and Knight Ltd v Birmingham Corporation21, 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

Ltd25.26 Keeping in mind public interest at large, corporate veil is also lifted at times

like in case ofDaimler 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 & GoosCases and Materials on Company Law (7th edition, Oxford UniversityPress, 2008) 106.19 [1933] Ch 935 (Court of Appeal).20 [1962] 1 All ER 442.21 [1939] 4 All ER 116.22Nicholas Bourne,Bourne on Company Law (4th edition,Routledge-Cavendish, 2007) 19.23 Susan Barber(ed), Company Law (3rd edition, Old Bailey Press, 2001) 15.24Re Express Engineering Works Ltd [1920] 1 Ch 466 (CA).25 (1953) 1 All ER 615.26Nicholas Bourne,Bourne on Company Law (4th edition,Routledge-Cavendish, 2007) 23.27 [1916] 2 AC 307.

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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 Smallbone29, 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 veiland 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 voluntarily30 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

GermanKonzernricht 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 theKonzernricht.34

28 Susan Barber(ed), Company Law (3rd 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 ofthe company. This kind of piercing is accepted under Belgian Law when it can be demonstrated that theshareholder has a personal interest in rendering certain commitments of its company possible by securingthem vis--vis third parties.31 Karen Vandekerckhove,Piercing the Corporate Veil (1st 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 itsshareholders such that it appears that the company was used as a company as a mere cover for theshareholdersown activities.33

Karen Vandekerckhove,Piercing the Corporate Veil (1st

edition, Kluwer Law International, 2007) 46.34 ibid.

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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, Re36

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 veilcases 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 subsidiaryor an associated companyetc.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 (16th edition, Taxman

Publications P. Ltd, 2011) 20.36 AIR 1927 Bom. 371.37 A.K. Majumdar and G.K. Kapoor, Taxmanns Company Law Practice (16th edition, TaxmanPublications P. Ltd, 2011) 20.38 [1991] 70 Comp. Cas. 127.39 A.K. Majumdar and G.K. Kapoor, Taxmanns Company Law Practice (16th edition, TaxmanPublications P. Ltd. 2011) 21.40 S. Ottolenghi, From Peeping Behind the Veil to Ignoring it Completely(1990) 53 The Modern LawReview 338.41 ibid 340.42 ibid.

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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 Behindthe Veil to Ignoring it Completely(1990) 53 The Modern Law Review 338, 351.

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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 attemptstowards tax evasions, they form the most prominent of these issues, while the others

include demand for public interest47, cases of fraud48, improper conduct49 and violation

of statutory obligations50 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 India51. 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 Ltd55

where sub-letting charges were not paid by the company whoseshares were acquired by another company, as both appeared to be the same entity,

which was realised after lifting the corporate veil.

47Daimler Co Ltd v Continental Tyre & Rubber Co. (GB) Ltd. [1916] 2 AC 307.48Jones v Lipman [1962] 1 All ER 442.49 Gilford Motor Co Ltd v Home [1933] Ch 935 (Court of Appeal).50LIC v Escorts (1986) 1 SCC 264.51 [2006] 71 SCL 142 (Delhi).

52 See William. M. Fletcher, Cyclopedia of The Law Of Private Corporations (3rd 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 BypassingOwnershipInterest(2004) 33 Sw. U. L. Rev. 573, 577 as cited in Thomas K. Cheng, The CorporateVeil 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).

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In a current case of Kotak Mahindra Bank Limited v Subhiksha Trading Services

Limited56, 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 case58

, 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 India59 was a

reconciliation of the cases of Commissioner of Inland Revenue v His Grace the Duke of

Westminster60 and WT Ramsay v Inland Revenue Commissioner61 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: CourtBusiness Line,(Chennai, 6 March 2012) accessed 7 March 2012.58 Glencore Grain Rotterdam B. V. v Shivnath Rai Harnarain (India) Company , (Delhi High Court, 6February 2012).59 (Supreme Court, 20 January 2012).60 (1935) All ER 259 [HL].61 (1981) 1 All ER 865.

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gains tax as the deal-making involved an Indian asset.62 Finally, on appeal, theSupreme

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 taxpayers64 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 TheEconomic Times (26 January 2012) 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) accessed 7 April 2012.67 This conclusion was reached after the successful reconciliation of the earlier Supreme Court decisionsin Commissioner of Inland Revenue v His Grace the Duke of Westminster, 1935 All ER 259 and WTRamsay v. Inland Revenue Commissioner (1981) 1 All ER 865.

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In another recent example where corporate veil was lifted was Richter Holdings Ltd. v

The Assistant Director of Income Tax68, 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 Limited70, corporate veil was not lifted71 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 ofAntonio Gramsci Shipping Corp v Stepanovs72 and VTB Capital plc

v Nutritek International Corp73 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 Corp74 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 March2011).70 (Delhi High Court, 23 March 2011).71 Kopran Limited v Commissioner of Central Excise, Raigad, (Customs Excise and Service TaxAppellate 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).

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for the default made on the loan75 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

inDadourian76 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 Stepanovs78 where Burton J

held that the corporate veil could be pierced, and a claim for damages made, if the

conditions in Trustor v Smallbone79 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) accessed 21 March 2012.76Dadourian 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) accessed 21 March 2012.78 [2011] EWHC 333 (Comm).79 [2001] WLR 1177.

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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 Smallbone81, 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.

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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 Council82 and the trend returned to the Salomon

case83.84 In the case of Dimbley & Sons Ltd v National Union of Journalists85, 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 Ltd87, 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 Ltd88,

described lifting the corporate veilas an esotericlabel89 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

investigated90

82 [1976] 1 WLR 852 (Court of Appeal).83 Salomon v A. Salomon and Co. Ltd (1897) AC 22 (HL).84Sarah Worthington, Sealys Cases and Materials in Company Law (9th Edition, Oxford UniversityPress, 2010) 66.85 [1984] 1 All ER 751.86 Alan Dickman,Hicks & GoosCases and Materials on Company Law (7th edition, Oxford UniversityPress, 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 Veilin Australia(2001) 19 Company and Securities Law Journal 253.

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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 others95 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 andillusionary97 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 Journal474, 478.92 John H. Matheson and Raymond B. Eby, The Doctrine of Piercing the Corporate Veil in an Era ofMultiple Limited Liability Entitles: An Opportunity to Codify the Test for Waiving Owners LimitedLiability 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 1661.94Miheer 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) 52U.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.

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Windeyer J, in Gorton v Federal Commissioner of Taxation99, 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 Salomon101 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 LawJournal 250.103Rasila 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 (7th 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,PenningtonsCompany Law (8th

edition, Oxford University Press, 2006) 43.

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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 TheEconomic Times (26 January 2012) accessed 30 January 2012.108 William W. Park, Fiscal Jurisdiction an Accrual Basis Taxation: Lifting the Corporate Veil to TaxForeign Company Profits(1978) 78 Columbia Law Review 1611.

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CONCLUSION

In Cotton Corporation of India Ltd. v G.C. Odusumathd109 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 facts113 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 (16th edition, Taxman

Publications P. Ltd. 2011) 19.111Northey & Leigh,Introduction to Company Law (4th 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).

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