Corporate Veil

A company is in law regarded as an entity

separate from its members. In other works, it has
an independent corporate existence. Any of its
members can enter into contracts with it in the
same manner as any other individual can. A
members cannot be held liable for the acts of the
company even if he holds virtually the entire
share capital. The leading case in which the legal
personality of a company was respected is as
follows:
Solomon v. Salomon & Co. Ltd., (1897) A.C. 22.

Salomon sold his shoe making business to a

new company for £30,000. His six family
members were given one share of 1 each. He
got himself allotted shares and debentures in
the new company as part of purchase
consideration. Subsequently when the
company was wound up, its assets were
found to be worth £6,000 and its liabilities
amounted to £17,000 of which £10,000 were
due to Salomon and £7,000 were due to
unsecured creditors.
The unsecured creditors claimed that
Salomon and the company were one
and the same person and, therefore,
they should be paid in preference to
Salomon. Held, the company was a
separate person independent from
Salomon and was not is agent.
Salomon, though the promoter and
virtually the holder of all the shares,
was also a secured creditor. He was
entitled to repayment in priority to
unsecured creditors.
Lee v. Lee's Air Farming Ltd., (1961)
A.C.12.

Lee held all but one share in the share capital

of Lee Air farming ltd. He got himself
appointed the managing director and the
chief pilot of the company. He was killed in
the accident while working for the company.
Ms. Lee filed a suit claiming compensation
for the death of her husband in the course of
his employment. The claim was challenged
by the insurance company on the ground that
Lee and Lee air Farming Ltd., were the same
person. Held, Lee was a separate person
Kondoli Tea Co. Ltd., Re (1886) I.L.R. 12 Cal.
43.

A tea estate was transferred to a company

by certain persons and claimed
compensation from transfer duty on the
ground that it was a transfer from them in
one name to themselves under another
name. Held, the transfer duty was imposed
as the company was a separate person
altogether from the shareholders and the
transfer was as much a conveyance, a
transfer of the property, as if the
 Lifting the corporate veil

From the legal point of view, a company is a

legal person distinct from its members. This
principle is referred to as 'veil of
incorporation'. The Courts in general
consider themselves bound by the principle
of the corporate veil. There is a fictional veil
between the company and its members, i.e.,
the company has a corporate personality
which is distinct from its members. When the
notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud or
defend crime, the law will regard the
In other words, the separate existence of the
company shall be disregarded. The exceptions
to corporate veil may be studied under two
heads, namely:
Judicial exceptions,

Statutory exceptions.

Judicial exceptions [i.e., the various Court

cases in which the separate existence of the
company has been disregarded]
Protection of Revenue
The legal personality of a company may be
disregarded where it is used for tax evasion. A
clear illustration is provided in the following
Dinshaw Maneckjee Petit, Re, A.I.R. (1927)
Bom. 371.

The assessee was a wealthy man having

huge dividend and interest income. He
formed four private companies in order to
reduce his tax liability. Dividend and interest
income received was handed back by the
company to him as a pretended loan. Held,
the company was formed by the assessee
purely and simply as a means of avoiding
super-tax liability and the company was
nothing more than the assessee himself.
 Prevention of fraud or improper
conduct

The Court shall not uphold the separate

existence of the company if it is formed to

defeat or circumvent law.

defraud creditors,

avoid legal obligations.

The following case illustrates the point:
Gilford Motor Co. Ltd. v. Horne (1933) Ch. 935
CA.

Horne was appointed as a managing director on

the condition that “he shall not at any time solicit
or entice away the customers of the company”.
He formed a company to carry on a business
which, if he had done so personally, would have
been a breach of the condition. Held, the
defendant company was a mere channel used
by the defendant Horne for the purpose of
enabling him, for his own benefit, to obtain the
advantages of the customers of the plaintiff
company and that the defendant company
Determination of character of company
whether it is enemy company or not.

A company may assume enemy character

when the3 persons in de facto control are
residents in an enemy country. In such a
case, the Court may in its discretion
examine the character of persons in real
control of the company and declare the
company to be an enemy company.
Daimler Co. Ltd. v. Continental Tyre &
Rubber Co. Ltd. (1916) 2 A.C. 307.

A company was formed in england for the

purpose of selling tyres made in Germany
by a German company. The German
company virtually held the entire share
capital in the English company. All
directors were German residents. During
the First World War, the English company
commenced an action to recover a trade
debt from another English company.
Held, it was not allowed to proceed with
Statutory Exceptions [i.e., various
Sections of the Companies Act under
which the legal personality of the
company shall be ignored].

Number reduced below statutory

minimum (Sec. 45)

A member is severally liable for the whole

of the debts of the company contracted
for more than six months if.
 the number of its members has been
reduced below:
- 7 in case of a public company; or
- 2 in case of a private company;
 he knows this fact; and
 he is a member during the time the
company so carried on business after
the six months.

It may be noted that the directors of the

company may be made personally liable
only when they happen to be members.
 Failure to refund application money
[Sec. 69 (5)]

The directors of a company are jointly and

severally liable to repay the application money
with interest if the company fails to refund the
application money of those applicants who
have not been allotted shares, within 130 days
of the date of issue of the prospectus.
 Misdescription of company's name
[Sec. 147 (4)]

Where an officer or agent of a company

who signs any bill of exchange, hundi,
promissory note, cheque without fully or
properly mentioning the company's name
and the address of its registered office, he
shall be personally liable.
 Fraudulent Trading (Sec. 542)

Sometimes in the course of the winding up of

a company, it may appear that some
business of the company has been carried on

with intent to defraud creditors or any other

persons; or
for any fraudulent purpose.

In such a case, the Court may declare that

any persons who were knowingly parties to
the carrying on of the business in this way
are personally liable.
 Holding subsidiary Relationship
(Sec. 212)

In the eyes of the law, the holding

company and its subsidiary are separate
legal entities:
But in the following two cases, a subsidiary
company may lose its separate identity to
a certain extent:
 Where at the end of its financial year,
a company has subsidiaries, it must
place before its members in general
meeting not only its own accounts, but
also a set of group accounts.

 The Court may treat a subsidiary

company as a branch or department
of one large undertaking owned by the
holding company.