Introduction 

The doctrine of separate legal entities is a fundamental principle of company law. It treats a company as a legal person separate from its members. This concept is commonly known as the 'corporate veil'. The corporate veil shields the company's members from personal liability and keeps the company's assets separate. However, courts have lifted or pierced the corporate veil in certain circumstances to identify the individuals behind the company.

This article explicates the concept of the corporate veil doctrine and statutory provisions in Indian law for lifting the veil. It also examines relevant judicial interpretations on when the courts may disregard the separate legal entity and fix liability on the members. The conclusion summarises the criteria for piercing the veil while emphasising that there can be no absolute test.

The Corporate Veil Doctrine 

In law, the concept of companies is that they are separate legal entities or legal persons entirely distinct from the individuals connected with them. It is a statutory requirement that the company possesses its existence upon registration, having perpetual succession, power to acquire, hold and dispose of property and to sue and be sued in its name. The "corporate veil", or the idea that a company is a separate and distinct entity completely separate from its owners, has been expounded in cases such as Salomon v. A Salomon & Co. Ltd. The principle was further reiterated in Lee v. Lee’s Air Farming Ltd. wherein it was held the majority owner could also operate as an employee of a company as he was distinct from it. In Indian law, one of the earliest cases to establish this doctrine was In Re The Kondoli Tea Co. Ltd. Incorporation of a company has the effect of the owners becoming “strangers to their own enterprise”. 

The “lifting” or “piercing” of the corporate veil may be understood as the law penalising individual members concerned with the company, disregarding the corporate entity which shields them. Ordinarily, courts are inhibited from treating a company as an "alias, agent, trustee or nominee of its members." The corporate veil is said to have been lifted if the law ignores the company and concerns itself directly with its members or officers. The presumption is that the corporate veil needs to stay intact, and the law generally does not attempt to pierce it except under exceptional circumstances. Often, it has been observed that keeping the veil intact is not in the interest of the members – in a case where even when the total number of shareholders and directors consented to the misuse of company money, it was held that the consent of the whole is not the consent of the company and the members were prosecuted of theft.. In another case, a company incorporated another entity and transferred some premises to it. When assessed for taxation, the profits earned by the former through the transfer were assessed as its income, with the court refusing to accept it as self-transfer. Despite this, specific statutory and judicial grounds exist for lifting the corporate veil. 

Statutory Provisions for lifting of the corporate veil 

The Companies Act, 2013 (“the Act”) provides numerous occasions wherein the corporate veil may be lifted and the persons behind a company be identified by law. There is criminal liability of fraud with a prescribed punishment of up to ten years imprisonment and civil liability prescribed for misstatements in the contents of the prospectus of the company. It is clear that a misstatement in the prospectus, which is issued inviting offers from the public for the purchase of securities is a severe wrong as it is further provided that if Section 26 is not fully complied with, "… every person who is knowingly a party to the issue of such prospectus shall be punishable…” prescribing a lifting of the corporate veil and discovery of the individuals beyond it. 

The Act provides that “….officer who is in default shall be liable to penalty….” if the company does not refund the application money for the issue of shares to the investors as prescribed under Section 39. A similar penalty for the officer in default is provided related to the misues of the name and registered office of the company. 

Section 216 explicitly provides for the investigation of ownership of a company. The Central Government is empowered to appoint inspectors to investigate and report on membership and ownership "….where it appears there is a reason so to do….”. The central government is to define the scope and period of the investigation and, if necessary, limit it to certain shares or debentures. Further instances of lifting of the corporate veil provided in the statute are in case of fraudulent inducement of persons to invest money and for fraudulent submission of mandatory disclosures. 

Judicial Interpretations and Trends

The Apex Court has held that the corporate veil may be lifted where the statute contemplates lifting the veil along with certain other occasions like fraud and improper conduct. Corporate veils have been lifted, and individuals in a company have been held accountable for indulging in malpractices, to identify who the principal is in case there is a wrongful activity performed by the agent and the defence of agency is invoked and in case of allegations that the company was formed exclusively for tax evasion. 

The corporate veil has been lifted in the cases of unjust enrichment and legal façade to conceal fraud. It has become a frequent practice that income tax authorities lift the corporate veil and look into the reality of transactions conducted under the corporate facade. The Apex Court has even lifted the veil to determine "whether the consumption of energy by a company was from its own source of generation." In Workmen v. Associated Rubber Industries case, the corporate veil was lifted to see if the corporation was preventing devices to avoid welfare legislation. All these cases are examples of situations where the corporate veil has been lifted, and the members of incorporated entities should be wary of this. 

Conclusion

It is neither necessary nor possible to have a hard and fast rule to dictate when to lift the corporate veil of companies. The judiciary may direct a lifting of the corporate veil depending on criteria such as: 

1. Statutory or other provisions
2. Object Sought for the lifting of the corporate veil
3. Nature and implications for the impugned conduct of the corporate entity 
4. Public interest is involved, and
5. Effect of lifting the veil on affected parties

While the corporate veil is intended to protect shareholders from liability, it cannot become an iron curtain for unscrupulous activities. However, some broad guiding principles emerge. Veil piercing is more likely when it furthers public policy goals, prevents abuse of corporate privileges, or provides remedies for wrongdoing. At the same time, courts must balance holding corporations accountable with the policy goals behind separate legal entities. The corporate veil doctrine continues to evolve through judicial law-making, yet excessive veil piercing can reduce the utility of the corporate form. The legislature and judiciary must continually re-examine this area to balance corporate privileges and responsibilities.

Sources

1. Companies Act, 2013
2. Salomon v. A Salomon & Co. Ltd., [1897] AC 22.
3. Lee v. Lee's Air Farming Ltd., [1960] UKPC 33. 
4. In Re The Kondoli Tea Co. Ltd, ILR (1886) 13 Cal 43.
5. A. Singh, Company Law, 13 (16^th ed. Reprinted, 2016).
6.  H.K. Saharay, Company Law, 15 (7^th ed., 2016). 
7. Attorney-General’s Reference (No 2 of 1983), 1984 QB 456.
8. Commissioner of Income Tax, Calcutta v. M/s Associated Clothiers Ltd., Calcutta, AIR 1963 Cal 629
9. Life Insurance Corporation of India v. Escorts Ltd., AIR 1986 SC 1370.
10. Santanu Ray v. Union of India, 1988 SCC OnLine Del 169.
11. Smith, Stone & Knight v. Birmingham Corporation, [1939] 4 All ER 116.
12. Bacha F. Guzdar v. Commissioner of Income-Tax, 1955 AIR 740. See also Sir Dinshaw Maneckjee Petit (in re:), AIR 1927 Bom 371.
13. Nellie Wapshare & Ors. v. Pierce Leslie and Co. Ltd. & Ors., AIR 1960 Mad 410.
14. The Commissioner of Income Tax, Madras v. Sri Meenakshi Mills Ltd., AIR 1967 SC 819.
15. State of UP and Ors. v. Renusagar Power Co. & Ors., AIR 1988 SC 1737.
16. Workmen v. Associated Rubber Industries, (1985) 4 SCC 114.