CHAPTER 5

1. Piercing of Corporate Veil under Statutory Provisions

enshrined under the Companies Act, 2013
The 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,1 the directors were held personally liable for a
cheque signed by them in the name of a company stating the company as
1 (1973) New LJ 637

L.R. Agencies Ltd. whereas the real name of the company was L&R
Agencies Ltd.
(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,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

2 (1885) 29 Ch D 459 (465)

directors had misrepresented through the statements in the prospectus which

was material to the contract.

(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

(ii)

holding company;
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

(iii)

company;
Any other body corporate whose Board of Directors comprises nominees
of the company or is accustomed to act in accordance with the directions

(iv)

or instructions of the company or any of its directors; or

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, 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
3 (36 Comp Cas 371)

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.
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.4

(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
4 Avtar singh, Inroduction to Company law, 11 th edition, p. 120

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, 5 goods were purchased on credit when the
managing director knew that the company was hopelessly insolvent. He was held
liable for such fraud.
But where a company remained in business only to save certain debentures from
becoming invalid6, and where an auditor failed to report a fraud, 7 no responsibility
arose under the section. But officers guilty of filing false purchase tax returns have
been held liable.8
Even a single act of fraud can amount to fraudulent trading. In Cooper Gerard
Chemicals Ltd, re,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.
5 (1932) 2 Ch 71
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]
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 be ultravires and, therefore, void and cannot be
ratified even if all the members wish to ratify it. This is called the doctrine of ultra
vires, which has been firmly established in the case of The Directors, &C., of the
Ashbury Railway Carriage and Iron Company (Limited) v Hector Riche10. Thus the
expression ultra vires means an act beyond the powers. Here the expression ultra
vires is 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 expression ultra vires is 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 of ultra vires objects clause of the companys memorandum.

10 (1874-75) L.R. 7 H.L. 653.

The doctrine of ultra vires was recognised in Indian the case of Jahangir R.
Modi v. Shamji Ladha11 and have been well established and explained by the
Supreme Court in the case of A.Lakshmanaswami Mudaliar v. Life Insurance
Corporation Of India12. 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, but it 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.
In Weeks v. Propert13, 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.

(h) Liability Under Other Statutes:11 (1867) 4 Bom HCR 185

12 AIR 1963 SC 1185
13 [1873] L.R 8 C.P. 427

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.14
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, 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 2015.16

14 Section 179
15http://icmrindia.org/free%20resources/casestudies/Business%20Ethics/ITC
%20%E2%80%93%20The%20FERA%20Violation%20Controversy.htm
16http://archive.financialexpress.com/news/enforcementdirectoratemayinitiateprose
cutionagainstitc.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, Re17, 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.,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.

In Juggilal Kamlapat Kanpur v. Commr. Of Income Tax,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.
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

18 AIR 1967 SC 819

19 (1970) AIR 529

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, Bombay20, 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.

(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.

20 AIR 1955 SC 74

In Gilford Motor Company v. Horne,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.
In Jones v. Lipman,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.
In Singer India Limited vs Chander Mohan Chadha & Ors, 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.
21 [1933] 1 CH 935
22 [1962] 1 All ER 442
23 Appeal (civil) 387 of 2004 in Supreme Court of India

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.

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 Chakola24, 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.

(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.

24 (2003) 115 Comp. Cas 127 (Ker.)

In Daimler Company Ltd. v. Continental Tyre & Co. (Great Britain) Ltd., 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.
In an American case Peopless Pleasure Park Co. v. Rohleder,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.
In Jyoti Ltd. v. Kanwaljit Kaur Bhasin,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
25 [1916]2 AC 307
26 (1908) 109 Va 439
27 (1987) 63 Comp. Cas. 626

persons who are guilty of such disobedience for punishing them for the contempt
of the court.
The Supreme Court of India observed in Life Insurance Corporation v. Escorts
Ltd.28 that:
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.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
28 (1986) 1 SCC 264
29 [1934] 4 All ER 116(KB)

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.
In Re F.G. (Films) Ltd.,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.
In Canada Enterprises Corporation Ltd. v. Mac Nab Distilleries Ltd., 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.
In Som Prakash Rekhi v. Union of India,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
30 (1953) All ER 615
31 (1987) 1 WLR 813
32 (1981) 1 SCC 449

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.

(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.33
In Santanu Ray v. Union of India,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.
33 Freewheels (India) Ltd. V. Veda Mitra(Dr.)
34 [1989] 65 Comp. Cas. 196 (Delhi)

In Vodafone International Holdings BV v. UOI,35 Hutchinson International (nonresident company) held 100% shares of CGP Investments Holdings Ltd. (nonresident 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.
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.36

(f) Where Company is used to avoid Welfare Legislation:35 Vodafone International Holdings BV v. UOI, Ministry of Finance and Asst. Director of Income Tax(InternationalTaxation),
[2009] 311 ITR 46 (Bom.)

36 Vodafone International Holdings BV v. Union of India, [2009] 179 TAXMAN 129

(SC).

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,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.
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,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

37 AIR 1986 SC 1.
38 1991 AIR 101

Corporation on the ground that they became inefficient in their work and started
inciting other members not to perform their duties.
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 thatNo 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, 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.
In SEBI v, Libra Plantation Ltd.,40 Bombay High Court allowed the property
acquired under fraudulent schemes to be chased even in the hands of third persons.

(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.

39 [1983] 54 Comp. Cas. 66 (Delhi)

40 [1999] 95 Comp. Cas. (Bom.)

In Delhi Development Authority v. Skipper Construction Co. (P.) Ltd., 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.
In Jyoti Limited v. Kanwaljit Kaur,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
41 AIR 1996 SC 2005
42 Supra note 27

plea that the sale had been made by the company and therefore the firm had not
disobeyed the courts order.
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,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)