Critically evaluate the circumstances in which courts will 'lift the veil' of incorporation

Ans :

Before we go to understand and discuss ‘the lifting of corporate veil’ it is pertinent to define the meaning of a company first. As per Section 3(1) (i) of the Companies Act states: ‘a company means a company formed and registered under this Act or an existing company as defined in section 3 (1) (ii).’ The company must be registered under the Companies Act for it to become an incorporated association.

Although it does not give a clear meaning but worldwide it is referred to distinguish the owner form its management.

Corporate Veil: It is a legal term used ( as in to raise a curtain from something to disclose it true identity) to separate the Individuality of a corporation from the personalities of its shareholders.

Lifting Of Corporate Veil: Sometimes taking the advantage of corporation personality of the company the members commit frauds and improper or illegal acts.

But we all know that an artificial person cannot indulge in illegal activity , then the façade of corporate personality will be removed to identify the persons who are at fault. This is known as ‘lifting of corporate veil’.

According TO Black Law’s Dictionary piercing of corporate veil are as follows: “the judicial act of imposing personal liability on otherwise immune corporate officers, directors, or shareholders for the corporation’s wrongful acts” .

There are two circumstances where lifting the corporate veil can occur

1) Alter-ego :- it says if there is any nature of constraints between the corporation and its shareholders.

2) Instrumentality Theory :- it benefits the owner rather than corporation by examining the use of a corporation by its owners.

But In English Law 5 points are stated for this :

(i) “Where companies are in a relationship of holding and subsidiary (or sub-subsidiary) companies;

(ii) Where a shareholder has lost the privilege of limited liability and has directly liable to certain creditors of the company on the ground that, with his knowledge, the company continued to carry on business for six months after the number of its member was reduced below the legal minimum;

(iii) In certain matters pertaining to law of taxes, death duties and stamps, particularly wherein the question of the “controlling interest” is in issue;

(iv) In the law relating to exchange control; and

(v) In the law relating to trading with enemy where the test of control is adopted.”

The most illustrative case decided by House of Lords- Salomon v. A Salomon & Co. Ltd.

Further in Lee v. Lee’s Air Farming Ltd, it was held that there was a valid contract of service between Lee and the Company, and Mr. Lee was therefore a worker within the meaning of the Act. It was a logical consequence of the decision in Salomon’s case that one person may function in the dual capacity both as director and employee of the same company.