Companies Act, 2013
Doctrine of Lifting of Corporate Veil
Case Study 1: Vjay Mallya case: Tribunal to take up application for final hearing
During the Debt Recovery Tribunal's proceedings post-lunch session, counsel for Kingfisher
Finvest pleaded before the Presiding Officer to hear the company's applications, including the
'Lifting of Corporate Veil', which is being heard by the tribunal after the bankers' made the plea.
The bankers had pleaded before the DRT for 'Lifting of Corporate Veil' to pierce the
protection against personal liability enjoyed by individuals controlling the company. The
doctrine of Lifting of Corporate Veil means disregarding the corporate personality and
looking behind the persons controlling the company.
In other words, where a fraudulent and dishonest use is made of the legal entity, the
individuals concerned - in this case Vijay Mallya - will not be allowed to take shelter behind the
corporate personality.
Source:
https://economictimes.indiatimes.com/news/politics-and-nation/vijay-mallya-casetribunal-to-take-up-7-ias-for-final-hearing/articleshow/52735970.cms
Discussion Question:
Q 1: When the court decides to lift the corporate veil and make the promoters liable for the debt
of the company?
Case Study 2: In Rs 5,600-crore NSEL scam, lifting of ‘Corporate Veil’ key to reach FTIL
The reports of PwC should not divert our attention from the main issues involved in retrieving
the Rs. 5,600 crore for the NSEL investors, who seem strangely gullible but greedy. The
following reports further support the adage, “facts are stranger than fiction”:
Notes to accounts of FTIL claim the company, NSEL, being a separate and independent entity, it
had no responsibility or liability towards the dues or claims against the NSEL (as filed on BSE).
A reported in the press, “MMTC claims Financial Technologies directors are directly involved in
the NSEL fraud. Quarterly reports of NSEL were submitted directly to the FTIL board.”
MMTC’s contention is that Shah and other directors are trying to hide behind a corporate
veil.
Some questions just don’t go away. Ever since the landmark judgment in Salomon v Salomon
(1897) case that established the independence and separateness of a company as distinct
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from its shareholders, the demand to the contrary — that courts discover the true motivation
behind a company’s action — does not abate. It is well established that the courts will lift the
corporate veil in certain circumstances.
Is this one such? Is this a case of acting as an agent (NSEL) of the parent or holding company
(FTIL)?
Another well-known case of Smith, Stone and Knight v Birmingham Corporation may provide
clues: the parent company (plaintiff) held all the shares, except a few, of its subsidiary that was
treated like a department and the parent was entitled to all the profits of the subsidiary. It was
held therein that the ratio of Salomon does not apply to a situation where there is a specific
arrangement between the shareholders and the company making the company an agent of its
shareholders and where the business of the company is the business of the shareholders.
The judge listed six factors, all based on control over day-today operations, to decipher the true
relations: Are the profits of the subsidiary treated as profits of the parent? Were the
persons conducting the business of the subsidiary appointed by the parent? Was the parent
the “head and brains” of the trading venture? Did the parent govern the adventure? Were
the subsidiary company’s profits made by the skill and direction of the parent? Was the
parent in effective and constant control of the subsidiary?
This case dates to 1939 but the facts are eerily similar to the accusation that FTIL controlled
NSEL and can serve as a precedent in the ongoing battle. Today, we find the parent (FTIL)
defending its separate legal entity against petitions filed by the NSEL Investors Forum and
MMTC demanding the unveiling of the ‘corporate cloak’ of NSEL on the grounds that it was
only an agent of FTIL; the brain behind the entire operations being a director of FTIL, currently
incarcerated. Lifting of the ‘corporate veil’ of NSEL to reach FTIL on the grounds of fraud is an
outcome that would be keenly awaited.
Source: https://economictimes.indiatimes.com/in-rs-5600-crore-nsel-scam-lifting-of-corporateveil-key-to-reach-ftil/printarticle/38887749.cms
Discussion Question:
Q 1: What factors decide that the liability of the subsidiary company is the liability of the
holding company?
Case Study 3: Tata row a test case for India: Docomo
Japan’s NTT Docomo on Thursday said it will continue to pursue options “in multiple
jurisdictions” to enforce the $1.2-billion arbitral award it won against the Tata group, while
keeping a close watch on the Reserve Bank of India’s (RBI) stance on the dispute.
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“In the meantime, Docomo will continue to pursue its enforcement options against Tata in
multiple jurisdictions and again calls upon Tata to co-operate with its partner, rather than oppose
Docomo's application,” the company said.
Docomo has already moved a London court seeking to enforce the arbitral award. A person
familiar with the case said a likely filing to recover the awarded amount would soon be
made in the US as well, where other Tata group companies such as TCS have interests.
While companies or their assets, such as TCS (US), Tata Steel (UK), and Jaguar (UK)
cannot be attached, lawyers have been talking of lifting corporate veils to establish gains
accruing to Tata Sons.
Source: https://economictimes.indiatimes.com/news/company/corporate-trends/tata-row-a-testcase-for-india-docomo/articleshow/54725158.cms
Case Study 4: Corporate veil can't be lifted as matter of routine
Lifting the corporate veil cannot be done as a matter of routine and certainly the police cannot do
that on its own to arrest a company founder, CEO or other directors over a commercial deal, said
a legal expert.
He was referring to the arrest of Yogendra Vasupal, founder of Stayzilla an online homestay
market place by the city police on Tuesday for not settling the dues of an advertising agency.
The basic tenet on which a company is incorporated under the Companies Act is that it is a
separate legal entity different from its promoters and shareholders. The liability of the
shareholders is limited to the capital they have invested and does not extend to their private
assets, they said.
"The corporate veil cannot be lifted as a matter of routine. There are several parameters to be
followed to lift the corporate veil. Normally corporate veil would be lifted in cases were the
corporate structure is used for evasion of government taxes, to act against public interest," D.
Varadarajan, Supreme Court advocate specialising in company/competition/insurance laws told
IANS over phone from New Delhi on Thursday.
"Unpaid vendors would rank as unsecured creditors and their dues would be settled only after the
settlement of government dues, secured creditors," a company secretary of a Mumbai based
private company told IANS not wanting to be named in the report.
According to Varadarajan, there is no promoter shareholding threshold or shareholding index for
lifting the corporate veil.
"Similarly for the sake of a commercial transaction the corporate veil cannot be lifted,"
Varadarajan added.
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Queried about the recourse that a vendor who is also a start-up can have for recovering his dues
from a wilful defaulter Varadarajan said: "Certainly it is a civil case and not a criminal one. The
affected vendor can file a case in the courts for settling commercial disputes. Payment default is
a business risk that a vendor faces."
Source: https://www.business-standard.com/article/news-ians/corporate-veil-can-t-be-lifted-asmatter-of-routine-117031600209_1.html
Discussion Question:
Q 1: Can the court lift the corporate veil to make the promoters and directors liable for the debts
of the company which were taken in ordinary course of business?
Case Study 5: Whether An Arbitral Award Or A Decree Can Be Executed Against The
Promoter And The Holding Company
A company incorporated under the provisions of the Companies Act is a juristic person and has a
corporate identity. The House of Lords in Salomon Vs. Salomon & Co. Ltd. case had held that in
law a company as a person is altogether different and distinct from its shareholders or directors.
The directors of the company are not liable for the debt of the company except to the extent
permissible by law. If the directors of a company have agreed to be personally liable to satisfy
the decree or the award passed against the company, the decree can be executed / enforced
against such directors. As a general proposition, the directors or the shareholders would not be
liable whenever a Decree or Award is passed against a company.
The law permits invoking of doctrine of lifting of the corporate veil. Indian courts have created
an exception to the principle laid down in Salomon vs Salomon & Co. Ltd case to cover the
cases of fraud, inappropriate conducts etc. But the Award Holder or the Decree Holder must
make out a case of fraud, inappropriate conduct etc. to hold the Directors of a company liable for
the Decree / Award to enforced against them.
The hon'ble Supreme Court, in Balwant Rai Saluja & Anr. Vs. Air India Ltd. & Ors. as reported
in 2014(9) SCC 407, had laid down the law with regard to the principle of piercing the corporate
veil which is an exception to the principle that a company is a distinct and separate entity i.e., it
is distinct from its shareholders and directors and that the company had its own legal rights and
obligations. The doctrine of piercing corporate veil would apply in a restrictive manner and
would apply only when it is evident that the company was a camouflage, or a sham deliberately
created by the persons exercising control over the said company for the purposes of avoiding the
liability. The relevant portion of the said judgment is extracted herein below for the sake of
convenience:
69. Vodafone case [Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613 :
(2012) 3 SCC (Civ) 867] further made reference to a decision of the US Supreme Court in
United States v. Bestfoods [141 L Ed 2d 43 : 524 US 51 (1998)]. In that case, the US Supreme
Court explained that as a general principle of corporate law a parent corporation is not
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liable for the acts of its subsidiary. The US Supreme Court went on to explain that
corporate veil can be pierced and the parent company can be held liable for the conduct of
its subsidiary, only if it is shown that the corporal form is misused to accomplish certain
wrongful purposes, and further that the parent company is directly a participant in the
wrong complained of. Mere ownership, parental control, management, etc. of a subsidiary
was held not to be sufficient to pierce the status of their relationship and, to hold parent
company liable.
70. The doctrine of "piercing the corporate veil" stands as an exception to the principle that a
company is a legal entity separate and distinct from its shareholders with its own legal rights and
obligations. It seeks to disregard the separate personality of the company and attribute the acts of
the company to those who are allegedly in direct control of its operation. The starting point of
this doctrine was discussed in the celebrated case of Salomon v. Salomon & Co. Ltd. [1897 AC
22 : (1895- 99) All ER Rep 33 (HL)] Lord Halsbury LC, negating the applicability of this
doctrine to the facts of the case, stated that: (AC pp. 30 & 31)
"[a company] must be treated like any other independent person with its rights and liabilities
[legally] appropriate to itself ... whatever may have been the ideas or schemes of those who
brought it into existence."
Most of the cases subsequent to Salomon case [1897 AC 22 : (1895-99) All ER Rep 33 (HL)] ,
attributed the doctrine of piercing the veil to the fact that the company was a "sham" or a
"façade". However, there was yet to be any clarity on applicability of the said doctrine.
71. In recent times, the law has been crystallised around the six principles formulated by
Munby, J. in Ben Hashem v. Ali Shayif [Ben Hashem v. Ali Shayif, 2008 EWHC 2380 (Fam)].
The six principles, as found at paras 159-64 of the case are as follows:
(i) Ownership and control of a company were not enough to justify piercing the corporate veil;
(ii) The court cannot pierce the corporate veil, even in the absence of third-party interests in the
company, merely because it is thought to be necessary in the interests of justice;
(iii) The corporate veil can be pierced only if there is some impropriety;
(iv) The impropriety in question must be linked to the use of the company structure to avoid or
conceal liability;
(v) To justify piercing the corporate veil, there must be both control of the company by the
wrongdoer(s) and impropriety, that is use or misuse of the company by them as a device or
facade to conceal their wrongdoing; and
vi) The company may be a "façade" even though it was not originally incorporated with any
deceptive intent, provided that it is being used for the purpose of deception at the time of the
relevant transactions. The court would, however, pierce the corporate veil only so far as it was
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necessary in order to provide a remedy for the particular wrong which those controlling the
company had done.
74. Thus, on relying upon the aforesaid decisions, the doctrine of piercing the veil allows the
court to disregard the separate legal personality of a company and impose liability upon the
persons exercising real control over the said company. However, this principle has been and
should be applied in a restrictive manner, that is, only in scenarios wherein it is evident that the
company was a mere camouflage or sham deliberately created by the persons exercising control
over the said company for the purpose of avoiding liability. The intent of piercing the veil must
be such that would seek to remedy a wrong done by the persons controlling the company. The
application would thus depend upon the peculiar facts and circumstances of each case.
Source: https://singhassociates.in/wp-content/uploads/2021/04/ILI-March.pdf
Discussion Question:
Q 1: What are the circumstances under which the court has the power to lift the corporate veil ?
Case Study 6 : Prevention of fraud or improper conduct
Where the medium of a company has been used for committing fraud or improper conduct,
courts have lifted the veil and looked at the reality of the situation.
The three classic cases of the fraud exception are Gilford Motor Company Ltd v. Horne; Jones v.
Lipman and Smith, Stone and Knight Ltd (SSK).
In the first case, Gilford Motor Co Ltd v Horne, Horne’s employment contract provided that,
if he left the employment of Gilford Motor Co Ltd, he would not solicit any of its clients.
Horne’s employment was terminated and, at Horne’s behest, his wife set up a company that
competed with Gilford. It was clear that this company was controlled by Horne. Gilford sued
Horne to enforce the restrictive covenant and prevent the new company from soliciting Gilford’s
clients.
Lord Hanworth MR stated that the company set up by Mrs Horne was ‘formed as a device, a
stratagem, in order to mask the effective carrying on of a business of [Horne]’. Accordingly,
Gilford’s action succeeded and the court granted an injunction prohibiting Horne and the new
company from soliciting Gilford’s clients.
In the second case of Jones v. Lipman, Mr. A agreed to sell certain land to Mr. B. Pending
completion of formalities of the said deal, Mr. A sold and transferred the land to a company
which he had incorporated with a nominal capital of £100 and of which he and a clerk were the
only shareholders and directors. This was done in order to escape a decree for specific
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performance in a suit brought by Mr. B. The Court held that the company was the creature of Mr.
A and a mask to avoid recognition and that in the eyes of equity, Mr. A must complete the
contract, since he had the full control of the limited company in which the property was vested,
and was in a position to cause the contract in question to be fulfilled.
Discussion Question:
Q 1: When the Directors are liable for the debt of the company?
Q 2: Are some of the Directors more liable than other Directors?
Q 3: Are Independent Directors or Non-Executive Directors less liable in comparison to
Executive Directors?
Q 4: What is the concept of Shadow Director?
Cast Study 7: Chandler v Cape Industries plc [2012] EWCA Civ 525
Between 1959 and 1962, Chandler was an employee of Cape Building Products Ltd (CBP), a
subsidiary of Cape plc. In 2007, Chandler discovered he had contracted asbestosis due to
exposure to asbestos while working for CBP. He sought to obtain compensation, but CBP had
been dissolved many years before. Accordingly, Chandler commenced proceedings against
CBP’s parent, Cape plc.
Cape was ordered to pay damages to Chandler. However, the court ‘emphatically’ rejected any
suggestion that the imposition of liability on Cape plc involved a piercing of the corporate veil.
Instead, the court held that Cape owed a duty of care to Chandler, which it had breached.
Arden LJ stated that such a duty could be imposed where:
1) the businesses of the parent and subsidiary are in a relevant respect the same;
2) the parent has, or ought to have, superior knowledge on some relevant aspect of health
and safety in the particular industry;
3) the subsidiary’s system of work is unsafe as the parent company knew, or ought to have
known; and
4) the parent knew or ought to have foreseen that the subsidiary or its employees would rely
on its using that superior knowledge for the employees’ protection.
The above circumstances were present here, so Cape plc had assumed a responsibility to
Chandler, so it was ordered to pay him damages.
Discussion Question
Q 1: Under what circumstances, the Holding company is liable for the debt of the subsidiary
company’s liability? / Discuss the factors which determine that the Holding and Subsidiary are
one and the same.
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Case Study 8: Where Company is a sham or cloak
When the court finds that company is a mere cloak or sham and is used for some illegal or
improper purpose, it may lift veil. In the leading case of P.N.B. Finance v. Shital Prasad, where
a person borrowed money from a company and invested it into three different companies, the
lending company was advised to bring together the assets of all the three companies, as they
were created to do fraud with the lending company.
Case Study 9: Supreme Court rules to hold personal guarantor accountable for corporate
debt
The Supreme Court has granted banks and other financial creditors the liberty to start recovery
proceedings against the promoters of insolvent companies who had provided personal guarantees
for loans to these entities.
The decision — which upheld a notification issued on November 15, 2019 amending the IBC
Code with the introduction of the relevant proviso — comes as a massive setback to Anil
Ambani, Kapil Wadhawan and around 70 other promoters who now will have to brace for action
from the lenders.
A bench comprising Justices L. Nageswara Rao and S. Ravindra Bhat held that the approval of
the resolution plan under IBC does not discharge the personal guarantors of their liability
towards the banks.
In over a dozen cases, several industrialists stood as personal guarantors for their corporate
entities for availing huge loans from public and private sector banks. But after the corporate
entities turned insolvent, the personal guarantors pleaded they cannot be fastened the liability in
the insolvency proceeding by the creditors before the National Company Law Tribunal (NCLT).
They argued that their liability to pay the debt as personal guarantors for the corporate debtors
stood extinguished once the insolvency and bankruptcy proceeding commenced before the
NCLT.
Several top banks such as the SBI which had extended loans running into several thousands of
crores had supported the central legislation and insisted that the personal guarantors ought to be
saddled with the debt and had already initiated the process of revoking the guarantee.
While dismissing the batch of petitions filed by the industrialists, the bench said: “It is held that
approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate
debtor) of her or his liabilities under the contract of guarantee. “
“As held by this court, the release or discharge of a principal borrower from the debt owed by it
to its creditor, by an involuntary process, i.e. by operation of law, or due to liquidation or
insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises
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out of an independent contractor. For the foregoing reasons, it is held that the impugned
notification is legal and valid.”
Source:
https://www.telegraphindia.com/business/supreme-court-rules-to-hold-personalguarantor-accountable-for-corporate-debt/cid/1816360
Case Study 10: Finvest Limited is a company incorporated in India. It has several subsidiary
companies incorporated in India. One of the subsidiary companies, Finvest Solutions Private
Limited took a loan of Rs. 50 lakhs from a bank. After securing the funds, it loaned the amount
to Finvest Limited. A year later, Finvest Solutions Private Limited defaulted in paying the loan
to the bank. The bank, realizing that the subsidiary company had insufficient funds to be able to
pay the loan, moved against Finvest Limited to recover the loan. It claimed that its money was
actually with it and it should pay the bank. Finvest Limited disclaims any liability. Analyze
whether Finvest Limited is liable to pay the money to the bank.
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