Lifting of Corporate Veil of the Companies in India
Lifting of Corporate Veil of Companies in India
What is Corporate Veil?
The corporate veil is a legal concept that separates the personality of a company from the personalities of its shareholders, directors, and officers. This means a company is treated as a separate legal entity, distinct from those who own or manage it.
The company itself can own property, incur debts, sue and be sued.
Shareholders have limited liability — they are only liable to the extent of their investment.
Creditors cannot pursue shareholders’ personal assets.
This concept was firmly established in the landmark case Salomon v. Salomon & Co. Ltd. (1897), which is the foundation of company law.
What is Lifting of Corporate Veil?
Lifting (or Piercing) the corporate veil means the courts disregard the company’s separate legal personality and hold the shareholders or directors personally liable for the company’s actions or debts. This is an exception to the general principle that a company is a separate legal entity.
The veil is lifted to prevent fraud, improper conduct, or misuse of the company form to circumvent the law or avoid liability.
When Does the Court Lift the Corporate Veil?
Courts lift the corporate veil in certain situations where it is necessary to:
Prevent fraud or improper conduct.
Identify the real actors behind the company who are trying to hide behind the company’s separate legal personality.
Ensure justice and equity where misuse of the company form has been done.
Cases involving public interest, statutory violations, or tax evasion.
Grounds for Lifting the Corporate Veil in India:
Fraud or Improper Conduct
If a company is used as a vehicle to perpetrate fraud or evade the law, courts can lift the veil.
Agency or Sham
Where a company acts as an agent or a façade for another person or company.
Group of Companies
Sometimes the veil may be lifted to see the reality behind the group structure.
Statutory Exceptions
Certain statutes expressly provide for lifting the veil in specific cases (e.g., Companies Act, Income Tax Act).
Avoidance of Legal Obligations
When the corporate structure is misused to avoid contractual or legal obligations.
Leading Case Laws on Lifting Corporate Veil in India:
1. Mafatlal Industries Ltd. v. Union of India, AIR 1997 SC 699
The Supreme Court held that the principle of separate legal entity is not an absolute rule.
The court can lift the corporate veil in cases of fraud, evasion of law, or to look behind the façade of the company.
The Court said that courts will pierce the veil only in exceptional circumstances.
2. Gilford Motor Co. Ltd. v. Horne (1933) Ch 935 (English Case Influential in India)
A company was incorporated to avoid a contractual obligation.
The court held that the company was a sham or façade and lifted the veil.
3. Union of India v. Sahara India Real Estate Corp. Ltd. (2012) 10 SCC 603
The Supreme Court lifted the veil to identify the real beneficiaries behind the company.
The court emphasized the principle to prevent misuse and protect public interest.
4. A.K. Brojo Nath Ganguly v. State of West Bengal, AIR 1953 SC 325
The veil of incorporation can be lifted to hold the persons behind the company liable if the company is used as an instrument of fraud.
5. DHBL v. Kavery Thread Processors Pvt. Ltd. & Ors., (2019) 5 SCC 738
The Court lifted the corporate veil to identify the real persons controlling the company involved in a financial dispute.
Important Points to Note:
Courts are reluctant to pierce the corporate veil and will do so only in exceptional cases.
Mere control by a parent company over a subsidiary is not enough to lift the veil.
Lifting is usually limited to the wrongdoers and persons in control.
The principle protects innocent shareholders and upholds the integrity of the company structure.
Summary:
| Aspect | Explanation |
|---|---|
| Corporate Veil | Legal separation between company and its members. |
| Lifting Corporate Veil | Disregarding this separation to hold persons liable. |
| Grounds | Fraud, sham companies, agency, statutory provisions. |
| Judicial Approach | Exception, only in cases of misuse or injustice. |
| Key Cases | Mafatlal, Sahara, A.K. Brojo Nath Ganguly, DHBL case. |
Conclusion:
The lifting of the corporate veil is a powerful judicial tool to prevent misuse of the separate legal entity principle of companies in India. While companies enjoy separate legal personality and limited liability, the courts have the authority to look beyond the corporate structure in cases involving fraud, evasion, or abuse of the corporate form. Indian courts, including the Supreme Court and various High Courts, have consistently maintained this balance between respecting the corporate entity and preventing its misuse.
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