LIFTING THE CORPORATE VEIL

The concept of piercing (lifting) the corporate veil describes a legal decision where a shareholder or director of a corporation is held liable for the debts or liabilities of the corporation. This is despite the general principle that shareholders are immune from suits in contract or tort that otherwise would hold only the corporation liable.

ESTABLISHED GROUNDS:
COMPANY IS A MERE SHAM Gilford motor Co Ltd. v Horne AVOIDANCE OF LEGAL OBLIGATIONS The court disregards to legal personality when it is used to avoid legal obligations.

ESTABLISHED GROUNDS:
AVOIDANCE OF WELFARE LEGISLATION The court may lift the veil when it feels the company has avoided welfare legislations.

AGAINST PUBLIC POLICY The court lifts the corporate veil to examine the matter if it seems opposed to public policy.

ESTABLISHED GROUNDS:
FRAUD OR IMPROPER CONDUCT The corporate entity is wholly incapable of being strained to an illegal or fraudulent purpose. The courts will refuse to uphold the separated existence of the company where it is formed to defeat or circumvent law, to defeat creditors or to avoid legal obligations.

ESTABLISHED GROUNDS:
DETERMINATION OF CHARACTER In some cases, the courts may in their discretion examine the character of persons in real control of the corporate affairs.

Daimler Co Ltd v Continental Tyre & Rubber Co Ltd

ESTABLISHED GROUNDS:
FOR BENEFIT OF REVENUE: The court has the power to disregard corporate entity if it is used for tax evasion or to circumvent tax obligation

ESTABLISHED GROUNDS:
GOVERNMENT COMPANIES A Government company is not a department or an extension of the State. It is not an agent of the state. Accordingly its employees are not civil servants and prerogative writes cannot be issued against it.

Som Prakash Rekhi v UOI

ESTABLISHED GROUNDS:
AGENCY OF TRUST Under the ordinary rules of law a parent company and a subsidiary company, even a 100 per cent subsidiary company, are distinct legal entities. In the absence of an agency contract between the two companies one cannot be said to be the agent of the other

Sione & Knight Ltd v Birmingham Corporation

STATUTORY SUPPORT:
REDUCTION IN NUMBER OF MEMBERS: Section 45 provides a minimum requirement of 2 in private company and 7 for public company The purpose of the provision is to withdraw the advantages of incorporation when the conditions of incorporation are not maintained

STATUTORY SUPPORT:
FRAUDULENT OR WRONGFUL TRADING:

Criminal liability Abuse of company names or employment of disqualified directors. Mis-description of the company

STATUTORY SUPPORT:
HOLDING AND SUBSIDAIRY COMPANIES: A company qualifies as a holding company when it has a power to control the composition of the board of directors of another company or holds a majority of its shares. The subsidiary is not to be held as an asset of the holding company.

INTERVIEW WITH THE JUDGES:

Why was lifting of corporate veil introduced? Did it highlight the limitations of companys act? Do you think it was right to introduce it?

What further steps can be taken to improve the same?

INTERVIEW WITH THE LAWYER:

Why

was

lifting of corporate introduced?

veil

Did it highlight the limitations of companys act? Do you think it was right to introduce it?

What further steps can be taken to improve the same?

CASE
PETITIONER: IYER and SON PRIVATE LTD.

RESPONDENT: L.I.C.

HISTORY OF CASE
IYER and SON PRIVATE LTD. were given a commercial license in 1949 in United India Life Building in Connaught place, New Delhi. On 6-3-1985 existing management of the company decides to handover the management to Mr. Vijay Kumar Gupta and Mr. Anil Kumar Gupta for an amount of Rs. 4,00,000.

AGREEMENT ON RECORD
Mr. R. S. Sethi will transfer shares to the incoming directors. Mr. R. S. Sethi continues to be the director till such time as to facilitate the working of the company. It has been assured by Mr. Sethi That the tenancy right of United India Life Building F Block are in the name of IYER and SON LTD.

REACTION

In response to the activity of transfer of shares LIC gives a notice alleging the company that the transfer amounted to SUB-LETTING. Eviction of Unauthorized Occupants ACT

JUDGEMENT

ESTATE OFFICER: The estate officer directed eviction of the petitioner holding it to be unauthorized occupants in terms of provisions of the Act.

JUDGEMENT

APPELLATE AUTHORITY: It is immaterial that the name of the company has remained the same. The learned estate officer has rightly applied the rule of lifting of corporate veil. The appellate authority agrees with the argument of learned councel.

JUDGEMENT

OPEN COURT: Mr Sandeep Agarwal urged that the findings of the Estate officer to the Appellate Body are unsustainable. CASES RELIED: Scintia Potteries and Service LTD. Vs. Govt of India CIT Vs. Standard Vaccum Co.

FINAL VERDICT
Undoubtedly, the petitioner company was the original tenant. The fact that the management has changed hands cannot be ignored. The petition is dismissed and it holds that no exception can be taken to the order of Appellate Authority lifting the corporate veil and the premises were SUBLET.