Doctrine of "Lifting the Corporate Veil" Or "Piercing the corporate veil" - Indian Laws - General

Doctrine of Lifting the Corporate Veil Or Piercing the corporate veil - 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. A Salomon Co Ltd., [1897] AC 22. Lord Halsbury LC (paragraphs 31 33), negating the applicability of this doctrine to the facts of the case , stated that: 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 the Salomon case (supra), attributed the doctrine of piercing the veil to the fact that the company was a sham or a fa ade . However, there was yet to be any clarity on applicability of the said doctrine. [ BALWANT RAI SALUJA VERSUS AIR INDIA LTD.- 2014 (8) TMI 1084 - SUPREME COURT] The position of law regarding this principle in India has been enumerated in various decisions. A Constitution Bench of this Court in Life Insurance Corporation of India v. Escorts Ltd. Ors., 1985 (12) TMI 289 - SUPREME COURT, while discussing the doctrine of corporate veil, held that: 90. 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 intended to be prevented, or a taxing statute or a 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 the public interest, the effect on parties who may be affected etc. The principle of lifting the corporate veil has to apply when the law is sought to be circumvented. In expanding horizons of modern jurisprudence, it is certainly permissible. Its frontiers are unlimited. The horizon of the doctrine is expanding. While the company is a separate entity, the Court has come to recognize several exceptions to this rule. One exception is where corporate personality is used as a cloak for fraud or improper conduct or for violation of law. Protection of public interest being of paramount importance, if the corporate personality is to be used to evade obligations imposed by law, the real state of affairs needs to be seen. The same principle applies while overseeing the compliance of applicable ethics of not permitting profit sharing or complying with the ceiling limit for the business which is violated by using the technique of sub contracts for outsourcing. If the premises are same, phone number/fax number is same, brand name is same, the controlling entity is same, human resources are same, it will be difficult to expect that there is full compliance on mere separate registration of a firm. The prohibition under Section 25 of the CA Act can be held to be defeated. It is perhaps for this reason that the network firms avoided giving the information sought by the Committee. The issue of separate oversight body for auditing work and updating existing legal framework appear to be necessary. [S. SUKUMAR VERSUS THE SECRETARY, INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA ORS. AND CENTRE FOR PUBLIC INTEREST LITIGATION VERSUS UNION OF INDIA ORS.- 2018 (2) TMI 1501 - SUPREME COURT ] In Kapila Hingorani v. State of Bihar 2003 (5) TMI 359 - SUPREME COURT , this Court held as under: The proposition that a company although may have only one shareholder will be a distinct juristic person as adumbrated in Salomon v. Salomon and Co., has time and again been visited by the application of doctrine of lifting the corporate veil in revenue and taxation matters. The corporate veil indisputably can be pierced when the corporate personality is found to be opposed to justice, convenience and interest of the revenue or workman or against public interest. Piercing the corporate veil- The precept of piercing the corporate veil owes its genesis to striking at illegality, attempts to perpetuate fraud and abuse of benefits. Unless it be found and established that such structuring is designed to obtain illegitimate or illegal gains, abuse the underlying objective of conventions, it would be wholly erroneous to place such entities under an initial or negative burden of proof. (TIGER GLOBAL INTERNATIONAL III, II, IV, HOLDINGS- 2024 (9) TMI 26 - DELHI HIGH COURT)