CHAPTER 5

1. Piercing of Corporate Veil under Statutory Provisions enshrined under the Companies Act, 2013The Veil of a company may be lifter in certain cases or pierced as per express provisions of the Act. In other words, the advantages of distinct entity and limited liability may not be allowed to be enjoyed in certain circumstances.The Companies Act, 2013 itself provides for certain cases in which the directors or members of the company may be held personally liable. In such cases, while the separate entity of the company is maintained, the directors or members are held personally liable along with the company. These cases are discussed below.(a) Misdescription of name of the company:- As per Section 12, a company shall have its name printed on bundles, promissory notes, bills of exchange and such other documents as may be prescribed. Thus, where an officer of the company signs on behalf of the company any contract, bill of exchange, hundi, promissory note, cheque or order of money; such person shall be personally liable to the holder if the name of the company is either not mentioned, or is not properly mentioned. The company and its officer who is in default shall be liable to a penalty of one thousand rupees for each day during which such default continues or for one lakh rupees, whichever is less.In Hendon v. Adelman,[footnoteRef:1] the directors were held personally liable for a cheque signed by them in the name of a company stating the company as L.R. Agencies Ltd. whereas the real name of the company was L&R Agencies Ltd. [1: (1973) New LJ 637]

(b) Mis-statements in Prospectus:- under the provisions provided u/s 34 ans 35 of the companies Act, 2013 that in case of misrepresentation in prospectus, the company and every director, promoter, expert and every other person, who authorised such issue of prospectus shall be liable to compensate the loss or damage to every person who subscribed for shares on faith of untrue statement.Besides, these persons may be punished with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud, as per the provisions of Sec 447. However, a person may escape the aforesaid conviction if he proves that such statement or omission was immaterial or that he had reasonable ground to believe, and did up to time of issue of the prospectus believe, that the statement was true or the inclusion or omission was necessary.In Edgington v. Fitzmaurice,[footnoteRef:2] the directors of a company issued a prospectus inviting subscriptions for debentures. They stated in prospectus that the objects of debentures were to complete alterations in the buildings of the company and to purchase horses and vans to expand the trade of the company. it was found that the real object of the loan was to enable the directors to pay-off pressing liabilities. The plaintiff took debentures relying upon the statements in the prospectus. The company became insolvent, therefore the plaintiff sued the directors for fraud. The court held that, trhe directors had misrepresented through the statements in the prospectus which was material to the contract. [2: (1885) 29 Ch D 459 (465)]

(c) Failure to Return Application Money:-According to Section 39, in the case of issue of the shares by a company to the public, if minimum subscription, as stated in the prospectus has not been received within 30 days of the issue of prospectus or such other period as may be specified by the SEBI, then as per rule 11 of Companies (Prospectus and Alottment of Securities) Rules, 2014, the application money shall be repaid within a period of 15 days from the closure of the issue and if any such money is not so repaid within such period, the directors of the company who ae officers in default shall be held joint and severally liable to repay the money with interest at the rate of fifteen percent per annum.In case of default, the company and its officer who is in default shall be liable to a penalty of one thousand rupees for each day during which such default continues or one lakh rupees, whichever is less.

(d) For facilitating the task of an Inspector appointed to investigate the affairs of a Company:-Power of inspector to investigate affairs of another company in same group or management: It provides that if it is necessary for the satisfactory completion of the task of an inspector appointed to investigate the affairs of the company for the alleged mismanagement, or oppressive policy towards its members, he may investigate into the affairs of another related company in the same management or group.Section 219 provides that if an inspector appointed under section 210 or 212 or 213 to investigate into the affairs of a company considers it necessary for the purpose of investigation, to investigate also the affairs of-(i) Any other body corporate which is, or has at any relevant time been the companys subsidiary company or holding company, or a subsidiary of its holding company;(ii) Any other body corporate which is, or has at any relevant time been managed by any person as managing director or as manager, who is, or was, at the relevant time, the managing director or the manager of the company;(iii) Any other body corporate whose Board of Directors comprises nominees of the company or is accustomed to act in accordance with the directions or instructions of the company or any of its directors; or(iv) Any person who is or has at any relevant time been the companys managing director or manager or employee,He shall, subject to the prior approval of the central government, investigate into and report on the affairs of the other body corporate or the managing director or manager, in so far as he considers that the results of his investigation are relevant to the investigation of the affairs of the company for which he is appointed.In LIFE INSURANCE CORPORATION OF INDIA v. HARI DAS MUNDHRA,[footnoteRef:3] a Division Bench of the Allahabad High Court consisting of V.G.Oak and S.N.Dwivedi,JJ., was dealing with a Corporation which owned and operated a large number of companies and it also owned 100 per cent share capital of its subsidiary company, M/s.Begg Sutherland and the Corporation controlled all its subsidiaries th managing agency. It was found that a member of the Corporation filed a petition under sections 397 and 398 of the Companies Act for removal of certain directors of the Corporation and for appoint Special Officer and for investigation of the affairs of the Corporation and some of the respondents. In that case, learned Company Judge held that the affairs of the Corporation were conducted in a manner prejudicial to the interest of the Corporation and its shareholders and it was necessary to settle a scheme for management of the Corporation under section 398 of the Companies Act, though the evi was not sufficient to establish misfeasance of the directors. Thus, two appeals were preferred before the Division Bench of the Allahabad High Court and the question before the Division bench was whether while dealing with the affairs of the holding company under sections 397 and 398 of the Companies Act, it is permissible to investigate into the affairs of its subsidiaries. [3: (36 Comp Cas 371)]

V.G.Oak,J. held that t company and subsidiary company are separate legal entities and broadly speaking, their affairs are separate. Learned Judge a for certain purpose, the affairs of the subsidiary company are treated as the affairs of the holding company under sections 214 (2), 318(3)(e) and the deleted section 338 of the Companies also held that it is not necessary to decide whether in every case brought under sections 397 and 398 of the Companies Act, the Court is entitled to make an inquiry into the affairs of the subsidiary company, but it was found on evidence that the holding compan consider and sanction transactions relating to the purchase and sale of shares of the subsidiary company. Learned Judge further found that whenever the subsidiary company found itself in financial difficulty, it approached the holding company for funds. Learned Judge therefore held that the subsidiary company is a branch or a department of the holding company and the affairs of the subsidiary company became the affairs of the holding company and hence, the affairs of the subsidiary company were relevant under sections 398 and 543 read with Schedule XI of the Companies Act.

(e) For Investigation of Ownership of Company:- Under Section 216, the Central Government may appoint one or more inspectors to investigate and report on the membership of any company for the purpose of determining the true persons who are financially interested in the company and who controls its policy or materially influences it.Public interest may sometimes require the central government to know the persons who are financially interested in a company and who control its policy or materially influences it. The central government may appoint inspectors for finding out these facts. The central government has also to appoint inspectors if the tribunal in the course of any proceeding before it directs that the affairs of the company ought to be investigated as regards its membership and other purposes. Powers of the inspectors are to extend to investigation of any circumstances suggesting the existence of any arrangement or understanding, which though not legally binding is likely to be observed in practice.[footnoteRef:4] [4: Avtar singh, Inroduction to Company law, 11th edition, p. 120]

(f) Fraudulent Conduct:- Sometimes it may appear in the course of winding up that the business of a company has been carried on with intend to defraud creditors of the company or any other person or for any fraudulent purpose. In such a case, the Tribunal, on the application of the Liquidator or any creditor or contributory of the company, may declare that the persons who were parties to such business shall be personally responsible for such debts of the company as the Tribunal may direct. Besides, every person who was knowingly a party to such conduct of business, is punishable with imprisonment or fine or both.In William C Leitch Bros Ltd, re,[footnoteRef:5] goods were purchased on credit when the managing director knew that the company was hopelessly insolvent. He was held liable for such fraud. [5: (1932) 2 Ch 71]

But where a company remained in business only to save certain debentures from becoming invalid[footnoteRef:6], and where an auditor failed to report a fraud,[footnoteRef:7] no responsibility arose under the section. But officers guilty of filing false purchase tax returns have been held liable.[footnoteRef:8] [6: Patrick & Lyon Ltd, re [1933Ch 786]] [7: Maidstone Building Provisions Ltd, re [(1971) 1 WLR 1085]] [8: Cyona Distributors Ltd, re [(1967) 2 WLR 369]]

Even a single act of fraud can amount to fraudulent trading. In Cooper Gerard Chemicals Ltd, re,[footnoteRef:9] a company obtained a price of certain goods to be supplied by it in advance knowing that it would not be able to supply the goods and paid off a creditor with that money. This was held to be sufficient to constitute fraudulent trading and both the company and the creditor, who knew how he was paid, were liable to refund the money. [9: [(1978) 2 WLR 866]]

(g) Liability for Ultra Vires Actions:-Directors and other officers of a company will be personally liable for all those acts which they have done on behalf of a company if the same are ultra vires the company.The object clause of the Memorandum of the company contains the object for which the company is formed. An act of the company must not be beyond the objects clause, otherwise it will beultraviresand, therefore, void and cannot be ratified even if all the members wish to ratify it. This is called the doctrine ofultra vires, which has been firmly established in the case ofThe Directors, &C., of the Ashbury Railway Carriage and Iron Company (Limited)vHector Riche[footnoteRef:10]. Thus the expressionultra viresmeans an act beyond the powers. Here the expressionultra viresis used to indicate an act of the company which is beyond the powers conferred on the company by the objects clause of its memorandum.An ultra vires act is void and cannot be ratified even if all the directors wish to ratify it. Sometimes the expressionultra viresis used to describe the situation when the directors of a company have exceeded the powers delegated to them. Where a company exceeds its power as conferred on it by the objects clause of its memorandum, it is not bound by it because it lacks legal capacity to incur responsibility for the action, but when the directors of a company have exceeded the powers delegated to them. This use must be avoided for it is apt to cause confusion between two entirely distinct legal principles. Consequently, here we restrict the meaning ofultra viresobjects clause of the companys memorandum. [10: (1874-75) L.R. 7 H.L. 653.]

The doctrine ofultra vireswas recognised in Indian the case ofJahangir R. Modiv. Shamji Ladha[footnoteRef:11] and have been well established and explained by the Supreme Court in the case ofA.Lakshmanaswami Mudaliar v.Life Insurance Corporation Of India[footnoteRef:12].Even in India it has been held that the company has power to carry out the objects as set out in the objects clause of its memorandum, and also everything, which is reasonably necessary to carry out those objects. For example, a company which has been authorized by its memorandum to purchase land had implied authority to let it and if necessary, to sell it. However it has been made clear by the Supreme Court that the company has, no doubt, the power to carry out the objects stated in the objects clause of its memorandum and also what is conclusive to or incidental to those objects, butit has no power to travel beyond the objects or to do any act which has not a reasonable proximate connection with the object or object which would only bring an indirect or remote benefit to the company. [11: (1867) 4 Bom HCR 185] [12: AIR 1963 SC 1185]

In Weeks v. Propert[footnoteRef:13], the directors of a railway company which had fully exhausted its borrowing powers advertised for money to be lent on the security of debentures. W lent 500 upon the faith of the advertisement and received a debenture. The court held that, the debenture was void but W would sue the directors for breach of warranty of authority since they had by advertisement warranted that they had the power toborrow which is in fact they didnt have. [13: [1873] L.R 8 C.P. 427]

(h) Liability Under Other Statutes:-Besides the Companies Act, 2013, the directors and other officers of the company may be held personally liable under the provisions of other statutes. Under the Income Tax Act, 1961, where any private company is wound up and if tax arrears of the company in respect of any income of any previous year cannot be recovered, every person who was director of that company at any time during the relevant previous year shall be jointly liable for the payment of tax.[footnoteRef:14] [14: Section 179]

Similarly under Foreign Exchange Regulation Act, 1973, the directors and other officers may be proceeded individually or jointly for violations under the Act.The leading example here is the ITC Scam Case,[footnoteRef:15] where the Enforcement Directorate, Customs and Department of Revenue Intelligence raided many ITC maintained institutions in Calcutta in October 1996. The agencies had solid evidences against the company for $100 million foreign exchange and Rs. 1750 Crores tax evasion fraud. But the prosecution couldnt be started due to the complexity of case where the alleged accused persons were spread in more than ten countries. But the enforcements have showed signs to register a case against the company in May 2015.[footnoteRef:16] [15: http://icmrindia.org/free%20resources/casestudies/Business%20Ethics/ITC%20%E2%80%93%20The%20FERA%20Violation%20Controversy.htm] [16: http://archive.financialexpress.com/news/enforcementdirectoratemayinitiateprosecutionagainstitc.shawwallace/38269]

2. Piercing of Corporate Veil under Judicial Interpretations:-It is difficult to deal with all the cases in which courts have lifted or might lift the corporate veil. Some of the cases where the veil of incorporation was lifted by judicial decisions may be discussed to form an idea as to be kind of circumstances under which the faade of corporate personality will be removed or the persons behind the corporate entity identified and penalized, if necessary.(a) For Protection of Reveue:-In Sir Dinshaw Maneckjee Petit, Re[footnoteRef:17], the assessee was a millionaire earning huge income by way of dividend and interest. He formed four private companies and transferred his investments to each of these companies in exchange for their shares. The dividends and interest income received by the company was handed back to Sir Dinshaw as a pretended loan. 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 assessee himself. It did no business, but was created simply as a legal entity to ostensibly receive the dividends and interests and to hand them over to the assessee as pretended loans. [17: AIR 1927 Bom. 371]

In CIT v. Sri Meenakshi Mills Ltd.,[footnoteRef:18] where the veil had been used for evasion of taxes and duties, the court upheld the piercing of the corporate veil to look at the real transaction. [18: AIR 1967 SC 819]

In Juggilal Kamlapat Kanpur v. Commr. Of Income Tax,[footnoteRef:19] The assessee firm used to promote companies. It purchased all the shares of a Company at the ruling rates with borrowed money and very soon thereafter disposed of all of them at a profit. Before the Income-tax authorities the assessee claimed that it had taken over the shares with a view to secure the managing agency of that Company and had thereafter distributed the shares to its allied concerns, that the transaction was only to facilitate acquisition of a capital asset and the profit realised from the sale of such a capital investment was a capital gain. It was, found by the Departmental authority and the Tribunal that the shares were not merely 'distributed to the assessee's associates, but that, some of the shares were sold to its allied concerns and others to strangers, through brokers, in small lots and at a profit. Also, the interest which the assessee had to pay for the amount borrowed for purchasing the shares was debited in its revenue account and was claimed before the Income-tax authorities as a revenue allowance. [19: (1970) AIR 529]

The question rose whether the total profits realised by the assessee was a capita1 gain or revenue income?The court held that, whether a transaction is or is not an adventure in the nature of trade is a mixed question of law and fact: in each case, the legal effect of the facts found by the Tribunal on which the tax-payer could be treated as a dealer or an investor in shares has to be determined.In the present case, on the facts found, there was a well planned scheme for earning profit. Therefore, all the transactions were impressed with the character of a commercial transaction entered into with a view to earn profits and were not capital investments and hence were liable to tax.

In Bacha F. Guzdar v. Commissioner of Income Tax, Bombay[footnoteRef:20], the agricultural income was exempted from tax under the Income Tax Act. The income of a Tea company was exempt to the extent of sixty percent as agricultural income and forty percent was taxed as income from manufacture and sale of tea. The plaintiff, a member of the tea company received certain amount as dividend in respect of the shares held by her in a tea company. She claimed that sixty percent of her income should be exempted from the Income Tax being from agricultural income. The Supreme Court rejected the argument of the plaintiff and held that although the income in the hands of the company was partly agricultural, yet the same income when received by the shareholders as dividend could not be regarded as agricultural income. [20: AIR 1955 SC 74]

(b) For Prevention of Fraud or Improper Conduct:-Where the medium of the company has been used for committing fraud or improper conduct, courts have lifted the veil and looked at the realities of the situation.In Gilford Motor Company v. Horne,[footnoteRef:21] Horne had been employed by the company under an agreement that he shall not solicit the customers of the company or compete with it for a certain period of time after leaving its employment. After ceasing to be employed by the plaintiff, Horne formed a company which carried on a competing business and caused the whole of its shares to be allotted to his wife and an employee of the company, who were appointed to be its Directors. It was held that since the defendant in fact controlled the company, its formation was a Mere Cloak or Sham to enable him to break his agreement with the plaintiff. Accordingly an Injunction was issued against him and against the company he had formed restraining them from soliciting the plaintiffs customers. [21: [1933] 1 CH 935]

In Jones v. Lipman,[footnoteRef:22] seller of a piece of land sought to evade specific performance of a contract for the sale of the land by conveying the land to a company which he formed for the purpose. Initially the company was formed by third parties, and the vendor purchased the whole of its shares from them, had these shares registered in the name of himself and a nominee, and had himself and nominee appointed directors. It was held that specific performance of the contract cannot be resisted by the vendor by conveyancing of the land to the company which was a mere faade for avoidance of the contract of sale and specific performance of the contract was therefore ordered against the vendor and the company. [22: [1962] 1 All ER 442]

In Singer India Limited vs Chander Mohan Chadha & Ors,[footnoteRef:23] respondent let out their shop at Connaught Place, New Delhi to M/s Singer Sewing Machine Company, incorporated under the laws of the State of New Jersey, USA, in 1966. In the year 1982, the landlord filed an eviction petition on the ground, inter alia, that the American Company, without obtaining any written consent from the landlord, had parted with the possession of the premises in dispute in favour of Indian Sewing Machine Company Limited, incorporated under the Indian Companies Act and it was the said company which was in exclusive possession of the premises and thereby it was liable for eviction in view of Section 14(1)(b) of the Delhi Rent Control Act. The eviction petition was contested by the appellant on the ground, inter alia, that a direction was issued to the American Company to reduce its share capital to 40 per cent in order to carry on business in India in view of Section 29 of Foreign Exchange Regulation Act, 1973. Accordingly, Company Petition was filed by the Indian Company before the Bombay High Court under Sections 391 and 394 of the Companies Act which was allowed in 1981, and a scheme of amalgamation was sanctioned whereby the undertaking in India of the American Company was amalgamated with the Indian Company. Under the scheme of amalgamation the whole of the business, property, undertaking, assets, including leases, rights of tenancy, occupancy etc stood transferred to and vested in the Indian Sewing Machine Company, namely, the Indian Company. It was submitted that the Indian Company is no other entity except the legal substitute of the American Company and in substance there is no case of sub-tenancy. The Additional Rent Controller, Delhi dismissed the eviction petition by the judgment and order dated 6.2.1995, but this was reversed by the Rent Control Tribunal in the appeal preferred by the landlord and eviction petition was allowed. The Second Appeal preferred by the appellant was dismissed by the High Court in 2001. During the pendency of the appeal before the Rent Control Tribunal, the name of M/s. Indian Sewing Machine Company was changed as Singer India Limited which is the appellant herein. [23: Appeal (civil) 387 of 2004 in Supreme Court of India]

CJI Mathur G.P. observed that, The concept of corporate entity was evolved 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.Furthermore, the court pierced the corporate veil and ordered the tenant to vacate the premises.In I.K.M. Basheer v. Lona Chakola[footnoteRef:24], the High Court of Kerala held that the requirement of premises for running the business of the company is altogether different from its requirement for the personal use of the director. Therefore, a suit for eviction against the tenant occupying the premises would not lie and he cannot be compelled to vacate the same to make it available for residential use of the Director. [24: (2003) 115 Comp. Cas 127 (Ker.)]

(c) For the Determination of the Real Character of a Company:-Company being an artificial person cannot be an enemy or friend. However, during war, it may become necessary to lift the veil and see the persons behind as to whether they are enemies or friends. It is because, though a company enjoys a distinct entity, its affairs are essentially run by individuals.In Daimler Company Ltd. v. Continental Tyre & Co. (Great Britain) Ltd.,[footnoteRef:25] a company was incorporated in London by a German company for the purpose of selling tyres manufactured in Germany. Its majority shareholders and all the directors were Germans. On declaration of war between England and Germany in 1914, it was held that since both the decision making bodies, the Board of Directors and the general body of shareholders were controlled by Germans, the company was a German company and hence an enemy company. Accordingly, a suit filed by the company to recover a trade debt was dismissed on the ground that such payment would amount to trading with enemy. [25: [1916]2 AC 307]

In an American case Peopless Pleasure Park Co. v. Rohleder,[footnoteRef:26] it was held that the Courts may refuse to pierce the corporate veil where there is no danger to public interest. In this case certain lands were transferred by an Englishan to another perpetually restraining the transferee from selling the said property to colored persons i.e. Negroes. The transferee however transferred the land to a company which was exclusively composed of Negroes. Thereupon, the petitioners brought an action against the company for annulment of the conveyance on the ground of Breach of condition. Rejecting the contention of the petitioners the court held that members individually or collectively are not corporation, which has a distinct legal existence, quite independent and separate from that of its members. [26: (1908) 109 Va 439]

In Jyoti Ltd. v. Kanwaljit Kaur Bhasin,[footnoteRef:27] the High Court of Delhi observed that if an order of the court is deliberately and willfully disobeyed by a company, public interest demands that companys corporate veil should be lifted to find out the real persons who are guilty of such disobedience for punishing them for the contempt of the court. [27: (1987) 63 Comp. Cas. 626]

The Supreme Court of India observed in Life Insurance Corporation v. Escorts Ltd.[footnoteRef:28] that: [28: (1986) 1 SCC 264]

Generally and broadly speaking, we may say that the corporate veil may be lifted where a statute itself contemplates lifting the veil, or fraud or improper conduct is to be prevented, or a taxing statute or beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be, in reality, part of one concern. It is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of public interest, the effect on parties who may be affected etc.

(d) Where Formation of Subsidiaries is only to Act as an Agent for the Holding Company:-A company may sometimes be deemed to have lost its individuality in favour of its principal and treated merely as an agent or trustee.In Smith, Stone & Knight v. Birmingham Corpn.[footnoteRef:29], it was observed that it is well settled that the mere fact that a man holds all the shares in a company does not make the business carried on by that company his business, nor does it make the company his agent for the carrying of business. This proposition is just a true if the shareholder is itself a limited company. it is also well settled that there may be such an arrangement between the shareholders and a company as will constitute the company the shareholders agent for purpose of carrying on the business and make a business, the business of shareholders. Thus, where an arrangement, as aforesaid, prevails, the individual shareholders may be identified for fixing their liability. [29: [1934] 4 All ER 116(KB)]

In Re F.G. (Films) Ltd.,[footnoteRef:30] an American company produced a film called MANSOON in India technically in the name of a British Company. The British company had a capital of 100 in 1 shares, 90 of which were held by the President of the American company which financed the production of the film. In these circumstances the Board of Trade refused to register the film as a British film on the ground that in the instant case the British company acted merely as the nominee of the American company. [30: (1953) All ER 615]

In Canada Enterprises Corporation Ltd. v. Mac Nab Distilleries Ltd.,[footnoteRef:31] three different debenture holders of a company transferred their debentures to their self controlled companies, which demanded repayment of the debentures. The defendant company was granted a stay against them on the ground that they were treated being identical with their companies and the court considered the substance of the transaction more important than the legal form. [31: (1987) 1 WLR 813]

In Som Prakash Rekhi v. Union of India,[footnoteRef:32] the assets and business of Burmah Shell was acquired and vested in the Central Government. The aggrieved employee, who had certain rights as to Provident Fund etc. against the former company, claimed them against the Government by means of a writ petition. His claim was resisted on the plea that the undertakings had been vested to a company which was registered under the Companies Act and therefore the question of writ against a private company would not arise. By rejecting the contention Mr. Justice Krishna Iyer held that since whole undertaking had been vested in Central Government, it had become a state undertaking. The learned judge emphasized that law should not go by the fact that whether the company is registered under the Companies Act or otherwise, but by the nature of the functions which the undertaking was performing. [32: (1981) 1 SCC 449]

(e) In Case of Economic Offences:- It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. It is up to the court to take stock to determine the nature of the new and sophisticated legal devices for economic offences and to expose the devices for what they really are and to refuse to give judicial benediction.[footnoteRef:33] [33: Freewheels (India) Ltd. V. Veda Mitra(Dr.)]

In Santanu Ray v. Union of India,[footnoteRef:34] it was held that in the case of economic offences a court is entitled to lift the veil of corporate entity and pat regard to the economic realities behind the legal faade. Here, it was alleged that the company had violated Section 11(a) of the Central Excises & Salt Act, 1944. The court held that the veil of the corporate entity could be lifted by adjudicating authorities so as to determine as to which of the directors was concerned with the evasion of the excise duty by reason of fraud, concealment or willful mis-statement or suppression of facts or contravention of the provisions of the Act and the rules made thereunder. [34: [1989] 65 Comp. Cas. 196 (Delhi)]

In Vodafone International Holdings BV v. UOI,[footnoteRef:35] Hutchinson International (non-resident company) held 100% shares of CGP Investments Holdings Ltd. (non-resident company) which in turn held 67% shares in the Indian company Hutchinson-Essar. Hutchinson-Essar was a joint venture between Hutchinson International and Essar. Vodafone International Holdings BV (non-resident company) acquired the entire share capital of CGP Investments Holdings Ltd. from Hutchison International. This resulted in an indirect transfer of 67% shareholding in Hutchinson-Essar to Vodafone. [35: Vodafone International Holdings BV v. UOI, Ministry of Finance and Asst. Director of Income Tax(InternationalTaxation),[2009] 311 ITR 46 (Bom.)]

The question which arose was, whether the income accruing to Hutchinson as a result of the transaction could be deemed to accrue or arise in India by virtue of Sec. 9 of the Income Tax Act. The Income Tax Department issued Vodafone a show cause notice asking why action should not be taken against it for failing to deduct tax at source under Sec. 195 of the IT Act while making payment of the consideration to Hutch. The validity of the show-cause notice was challenged by Vodafone in a writ petition before the Bombay High Court. The High Court held that the writ petition challenging the show-cause notice was premature as an alternative remedy was available to the petitioner. Vodafone appealed in the Supreme Court. The petition was dismissed with a direction to re- agitate the jurisdictional issue before the assessing officer.[footnoteRef:36] [36: Vodafone International Holdings BV v. Union of India, [2009] 179 TAXMAN 129 (SC).]

(f) Where Company is used to avoid Welfare Legislation:- In cases where it is found that the sole purpose of the formation of a new company was to use it as a device to avoid liability under any welfare legislation, the court may lift the corporate veil to look at the real transaction and purpose behind it.In Workmen of Associated Rubber Industry Ltd. v. The Associated Rubber Industry Ltd., Bhavnagar,[footnoteRef:37] a new company was created wholly owned by the principal company, with no assets of its own except those transferred to it by the principal company, with no business or income of its own except receiving dividends from shares transferred to it by the principal company and serving no purpose whatsoever except to reduce the gross profit of the principal company. [37: AIR 1986 SC 1.]

The Supreme Court found that the creation of nw company was intended as a device to reduce amount of bonus payable to workmen of the principal company and therefore the separate existence of the two companies had to be ignored while computing the bonus. The court further observed:It is the duty of the Court, in every case where ingenuity is expected to avoid taxing and welfare legislation, to go behind the smoke screen and discover the true state of affairs. The Court is not to be satisfied with form and leave well alone the substance of a transaction.In Delhi Transport Corporation v. D.T.C. Mazdoor Congress,[footnoteRef:38] respondents were regular employees of the appellant Delhi Transport Corporation, were served with termination notices under Regulation 9(b) of the Delhi Road Transport Authority (Conditions of Appointment & Service) Regulations, 1952 by the appellant Corporation on the ground that they became inefficient in their work and started inciting other members not to perform their duties. [38: 1991 AIR 101]

The respondents and their Union filed writ petition in High Court, challenging the constitutional validity of Regulation 9(b), which gave the management right to terminate the services of an employee by giving one month's notice or pay in lieu thereof. The Division Bench of the High Court struck down the Regulation, holding that the Regulation gave absolute, unbridled and arbitrary powers to the management to terminate the services of any permanent or temporary employee, and such power was violative of Article 14 of the Constitution. Hence, the Corporation filed the appeal before the Supreme Court, by special leave.Then Chief Justice of India Mukherjee S. held the rule unconstitutional and against public policy. He observed that-No doubt, it is open to the authorities to terminate the services of a temporary employee without holding an enquiry. But in view of the march of law made, viz., that it is not the form of the action but the substance of the order which is to be looked into, it is open to the Court to lift the veil and pierce the action challenged to find whether the said action is the foundation to impose punishment or is only a motive. The play of fair play is to secure justice procedural as well as substantive. The substance of the order, the effect thereof is to be looked into.

(g) Where a company is used for Illegal or Improper Purpose:-Courts have shown themselves willing to lift the veil where device of incorporation is used for some illegal or improper purpose.In PNB Finance Limited v. Shital Prasad Jain,[footnoteRef:39] in pursuance to a request made by S, the financial advisor of a financing public limited company, granted a loan of fifty lakh rupees to S on his representation that he would utilize the said amount for the purchase of immovable property in Delhi and the directors of the plaintiff company sanctioned the loan, interalia, on the condition that the loan would be secured by deposit of the title deeds of the property. A promissory note with regard to the same was also executed by S. However, S did not pay anything either towards the principal amount or towards interest. Instead, he diverted the amount of the loan to three punlic limited companies floated by him and his son. These companies, in turn, applied the amount of loans so diverted in purchasing immovable properties at New Delhi. The question that arose was whether the defendant (S his son and the three publc companies limited companies) could be restrained from alienating the properties purchased. The court granted relief to the plaintiff by restraining the defendants from any alienation, transfer, disposal or encumbering of the properties in question. [39: [1983] 54 Comp. Cas. 66 (Delhi)]

In SEBI v, Libra Plantation Ltd.,[footnoteRef:40] Bombay High Court allowed the property acquired under fraudulent schemes to be chased even in the hands of third persons. [40: [1999] 95 Comp. Cas. (Bom.)]

(h) To Punish for the Contempt of the Court:-The doctrine of lifting of the corporate veil can also be used to prevent abuse of process of Court, and punish for the contempt.In Delhi Development Authority v. Skipper Construction Co. (P.) Ltd.,[footnoteRef:41] the Supreme Court has observed that the lifting or piercing the corporate veil can be undertaken by Court to see the real men behind the veil who are involved in defrauding others by corrupt and illegal means in deliberate defiance of the Courts order. In the instant case, the company was defrauding others in deliberate disobedience of Supreme Courts orders which amounted to contempt of the court. Disposing of the appeal, the Supreme Court observed that imposing of punishment for contempt would not denude the Court of its power to issue directions and make appropriate orders to grant relief to the persons aggrieved in order to do complete justice. For this purpose, the court can lift the corporate veil of the company to look into misdeeds of its officials and punish them i.e. the contemnors. That apart, the Court may also order the contemnors to restore the illegally derived benefit to the persons who are defrauded so that the contemners are not able to retain the fruits of the contempt. The Court may also order forfeiture/attachment of the properties acquired by the illegal and corrupt means by the real men behind the corporate as also the properties of their family members. [41: AIR 1996 SC 2005]

In Jyoti Limited v. Kanwaljit Kaur,[footnoteRef:42] a firm of two partners agrred to sell two floor to parties but cancelled the agreement. Litigation followed and the High Court restrained the firm from selling the property. In the meantime, a private company was floated by the two partners who being the only two shareholders became the chairman and the managing director respectively and the property was transferred to the company. In spite of the High Court restraint order the company sold off two floors. In answering to the contempt proceedings, the partners of the firm took the plea that the sale had been made by the company and therefore the firm had not disobeyed the courts order. [42: Supra note 27]

The Court held that, once the corporate veil is lifted, it is crystal clear that the orders of the court were disobeyed by the respondents. The company was admittedly promoted by the respondents alone. They only were its shareholders and directors. One of the respondents was its chairman and the other respondent, Managing Director. The entire interest in the company was of the respondents. Thus, in reality the order of the court was disobeyed by the respondent.

(i) For the Determination of Technical Competence of the Company:-The Supreme Court in New Horizons Ltd. v. Union of India,[footnoteRef:43] heald that the experience of the promoters could well be considered as the experience of the company in determining its technical competence. [43: [1995] 1 Comp. L.J. 100(SC)]