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Lifting the Corporate Veil

Since a company is a legal person distinct from its members there is assumed to be a curtain, a veil
or a shield between the company and its members. The principle of separate legal entity was
established in the case of Salomon vs Salomon and company Ltd. Thus once a company is formed
there is a veil between the company and its members. Based on this principle it is not easy to go
behind the curtain and see who are the real persons composing the company.
There are however cases when the corporate veil has to be lifted to look at the individual members
who are in fact the real beneficial owners of all corporate property. Thus lifting corporate veil means
identification of a company with its members and when the corporate veil is lifted the individual
members may be held liable for its acts or entitled to its property.
Some of the instances when the corporate veil may be lifted include where it is for the benefit of
revenue, where it is essential to secure justice and where it is in public interests. The corporate veil
may be lifted by: -
a) The courts
b) The statute
a) Lifting by the courts
1. Determination of the character of the company.
A company may be declared an enemy character when its directors are residents of an enemy
country. Therefore courts may lift the veil to ascertain the nationality of persons controlling the
company.
In Daimler company Ltd vs continental Tyres and rubber company Ltd 1916 AC 307 Daimler
company was sued by continental tyre company for recovery of a debt of Tyres supplied
continental tyres was incorporated in England for purpose of selling in England tyres made in
Germany. The shareholders of continental tyres were Germany except one and all directors were
Germany .
During the First World War continental tyres commenced an action to recover a debt from
Daimler. Daimler contested arguing that continental tyres was an enemy company. It was held that
continental tyres was an alien company and the payment of debt would amount to trading with an
enemy.

2. Prevention of fraud or improper conduct.
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The veil may also be lifted if a company is formed for a fraudlent purpose or to avoid legal
obligations.
Professor Leower says that the veil of a corporate body will be lifted where the corporate
personality is being blantantly used as a clock for fraud or improper conduct.
Case law Jones vs Limpman 1962

3. Where a company is a shaw.
This refers to a situation where a company is formed and used for some illegal or improper purpose.
Case law Luniford motors Company Ltd vs Horne (1933)

4. Where the company is acting as the agent of the shareholders.
When a company is acting as an agent of its shareholders or of another company, it will be liable for
its acts. There may be express agreement to the effect or an agreement (of agency) may be implied
from the circumstances of each particular case.
Case law relating to this is the F.G Film Ltd in Re (1953) I ALL E.R 615.
An American company financial the production of a film in India in the name of a British company.
The president of the British company, the board of trade of Great Britain refused to register the film
as a British film. The decision was held as a valid in view of the fact that British company acted
merely as the agent or nominee or the American company.

5. Protection of Revenue.
This is especially the case when a company is formed to assist shareholders evade taxes. In such case
the shareholders may be held liable to pay income tax.
Case law illustrating is that of Sir Dinshaw Maneckfen Pefi Re AIR (1927) Bom 371.D.

6. Protecting public policy.
Courts lift the corporate veil to protect the public policy and prevent transactions contrary to public
policy. Where there is a conflict between the separate entity principled and public policy the courts
ignore form and take into account the substance (Conners vs Connors Ltd (1940) for ALL ER 174).

Lifting by statute.
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1. When members fall below statutory minimum. As per section 33 of the Act, a business is
not allowed to carry on business for more than six months if membership falls below seven
incase of a public company and below two in case of a private company. Anyone aware of the
fall of membership and continues to carry on business will be held liable for all debts of the
company contracted after six months.
2. Misdescription of the company.
Sec 109 of the Act states that the name of the company must be fully and properly mentioned on all
documents issued by it. Where an officer of a company signs, on behalf of the company, a bill of
exchange, promissory note. Cheque, order for money or goods in which the companys name is not
mentioned the officer is personally liable to the holder of the bill of exchange.
Case law in this case, Hendon vs. Alderman (1973) 117s 631.
3. Holding and subsidiary companies.
Although both holding and subsidiary companies are separate entities there are instances where a
subsidiary may loose its separate identity to a certain extent.
a) Where at the end of the financial year a company has subsidiaries, it may lay
before the members in a general meeting not only its own account but also a set of
group accounts showing the profits and loss earned by the company and its
subsidiaries and their collective state of affairs at the sixth schedules.
b) Section 167 empowers the inspector appointed by the court to regard the
subsidiary and the holding company as one entity for the purpose of investigation.

4. Investigation of company membership.
Section 173 (s) empowers the registrar to appoint one or more competent inspectors to investigate
and report on the membership of any company for the purpose of determing the true persons who
are or have been financially interested in the success or failure of the company or able to control or
to influence the policy of the company. To investigate the corporate veil is lifted to ascertain the real
persons controlling it.
5. Take over Bids.
Section 210 provides that where scheme or contract inviting the transfer of shares or class of shares
in the company to another company has been approved by the holders of not less than nine tenths
in the value of shares whose transfer is involved the transferee company may at any time within two
months after the making of the offer by the transferor company, give notice in the prescribed
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manner to any dissenting shareholder that it deserves to acquire his shares. This is illustrated in the
case Re Bufle press Ltd.
6. Fraudlent conduct of Business.
Section 323 of companys Act in the course of winding up to a company it appears that any business
of the company has been carried on with intention to defraud creditors, the court may declare that
any person who were knowingly, parties to the carrying on such business are to be personally liable
for the debts and other liabilities of the company.

7. Prosecution of deliquent officers and members of company.
Section 325 of Act if in the course of winding up of a company it appears that any past or present
officer or any member of the company has been guilty of any offence in relation to the company
then the court may declare such a person liable for his offence.