In the leading case, Salomon v A Salomon and Co Ltd [1897] AC 22, it was held that a company is distinct and separate from its members.

In the case Bacha F. Guzdar v. CIT., Bombay the supreme court of India led out that the juristic personality of the company is different from its members and this position has been used since the company and its members are separated from the veil called the veil of the corporation. The principle of this veil is that there is a veil between the company and its members, that the company has a distinct personality other than its members, and that is why they are not liable for the act done by the members of the company and vice versa.

The members of the company have used this rule in a shoddy manner for their profit, but in some circumstances, the court would leave the corporate veil and unveil the truth behind the company. This law doesn't let the company's separate personality be misused or abused. In these circumstances, if the court feels they lift the corporate veil, expose their true character and repel the Salomon principle. It refers to the situation in which the shareholders are made liable for the corrupt act done by them in the name of the company despite the role of the separate liability. The possibility of looking behind the working of the company is.

There are two circumstances under which the corporate veil is lifted:

1. Statutory provisions
2. Judicial interpretations

Elements for lifting the corporate veil

Three major elements have to be established by the aggrieved party in the court to lift the corporate veil:

1. Control and domination
   The aggrieved party have to prove that the shareholders have complete control and dominance in the company.
    
2. Improper purpose and use
   The second test for the lifting of the corporate veil is to prove that the state–holder used its dominant position to commit fraud or deceive the person or any action that was in contravention of the late provisions and has affected the legal rights of such persons
    
3. Resulting damage or legal injury
   The aggrieved party has to establish that the dominant shareholders from an illegal act have caused damages to the plaintiff.

Grounds for lifting the corporate veil:

• Judicial interpretation
  Fraud and improper conduct
  If the company's separate personality is used as a medium for fraud and improper conduct, the court leaves the court veil and looks at the situation. Fraud and improper conduct include misusing the company's assets for personal use, intentionally conducting business to mislead others and all the other kinds of fraud. In the case of Commissioner of Income Tax Vs. Association Clothiers Ltd. (1963) in this case the Calcutta high court held that the veil should be lifted in exceptional conditions such as lifting the veil in cases of fraudulent activity or misdescription. There are some classic cases in which the veil was lifted due to fraud where:
  
  1. Gilford Motor Co Ltd v Horne [1933]: In this case, Horne was employed in the company with the agreement that he would not be allowed to solicit the clients of the company after leaving the company or compete with them for a certain period of time. However, after leaving the company, Horne started a new company, with all shares allotted to his wife and an employee of the company, making them directors of the company. The court held that the purpose of the formation of the company was to avoid a legal obligation from the contract and that the formation was a "cloak or sham," which was impermissible. Hence, the corporate veil was lifted, and Mr. Horne was made liable for a temporary injunction restraining them from soliciting the plaintiff's customers.
      
  2. Jones v Lipman [1962] 1 W.L.R. 832: In this case, a person formed a contract to sell his property but later changed his mind. He transferred the property to a company created by two people, himself and his clerk, to avoid specific performance under the contract. The court held that the company was merely a mask that Lipman used to prevent the consequences of failing to fulfill the contract. The court lifted the veil and awarded specific performance against the company and Mr. Lipman.
      
• Determination of the enemy character of the company
  The company is said to be an enemy character when the de facto control of the company is in the hand of the enemy country or most of the work being done is done by the enemy country there belongs to the enemy country. So, in this case, the court will examine the character of the people and would lift the corporate veil. In the case Daimler Co.Ltd V. Continental Tyre And Rubber Co.Ltd the continental tyre was formed and registered in England but except for one shareholder, all the shareholders were German. When war was declared between England and Germany in 1914, it was determined that since both the Board of Directors and the general body of shareholders were controlled by Germans, the company was considered a German entity and, therefore, an enemy company. Consequently, the company's lawsuit to recover a trade debt was dismissed, as making such a payment would be equivalent to trading with the enemy.
  The nationality of the shareholders is to be determined to establish enemy character.
   
•  Public policy
  The court will leave the veil when any act is contrary to the public policy to protect the public policy if any company goes against the interest of the. Public and public policy then in this case the veil would be lifted and the people behind it would be punished. There are cases in which the veil was lifted:
  
  1. Connors Bros vs Connors (1940): The House of Lords classified the company as an enemy entity because its de facto controllers were residents of Germany, a nation at war with Britain at the time. Consequently, the company was barred from pursuing any legal action, as doing so would have indirectly or directly provided funds to the enemy, which was deemed contrary to public policy.
      
  2. State of Rajasthan and Ors. v. Gotan Lime Stone Khanji Udyog Pvt. Ltd. and Ors (2016): The Supreme Court decided to lift the corporate veil for reasons of public interest, stating that it could be done when necessary. In this case, the corporate structure was used to hide the real transaction, which involved transferring a mining lease to a third party without the required legal approval. The transaction was split into two parts: first, converting a partnership into a company, and second, selling all the shares of that company to another business. However, the actual purpose was to sell the mining lease, which was illegal.
      
• In the interest of revenue and tax evasion
  The court has the power to lift the corporate veil when the company is formed to disregard corporate entities or if it is used for tax evasion. A clear illustration is Sri Dinshaw Maneckjee Petit, Re ARI 1927 The assesses, a millionaire with substantial income from dividends and interest, created four private companies and transferred his investments to them in exchange for shares. The companies received the dividends and interest, which were then returned to the assessee as fake loans. It was determined that these companies were set up solely to avoid taxes and were essentially just extensions of the assessee. They conducted no real business and existed only as legal entities to collect the income and funnel it back to the assessee under the guise of loans.
  
  Similarly, In CIT v. Sri Meenakshi Mills Ltd. (AIR 1967 SC 819), where the corporate structure was used to evade taxes and duties, the court supported lifting the corporate veil to examine the actual transaction.
  
  In Vodafone International Holdings BV v. Union of India, the Supreme Court noted that the Income Tax department could lift the corporate veil if it could prove that the transaction was a scheme to evade taxes. The court ruled that the department had the authority to look beyond the corporate structure to determine whether the company was a resident of Mauritius and if it was paying income tax there.
  
  In Richter Holding v. The Assistant Director of Income Tax, the Karnataka High Court applied the doctrine of lifting the corporate veil to allow the fact-finding authority to uncover the true nature of the transaction and determine the facts. The court held that the assessee, as the majority shareholder, benefits from the company's assets through interest and capital gains. It emphasized the need to assess whether the share transfer involved an indirect transfer of the company's assets and interests, particularly in the context of revenue and tax enforcement.
   
• Avoidance Of Welfare Legislation
  avoidance of welfare legislation is as prevalent as tax avoidance, and courts typically similarly handle both. In every case where clever tactics are used to bypass welfare laws, the courts must see through the facade and uncover the actual circumstances.
  
  In Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 59 Comp Cas. 134, A Ltd. transferred its shares in B Ltd. to its wholly-owned subsidiary, C Ltd., which had no other assets or income. This transfer reduced A Ltd.'s profits, affecting the bonus payable to its workmen. The Industrial Tribunal and High Court ruled A Ltd. and C Ltd. were separate entities, but the Supreme Court found that C Ltd. was created solely to lower A Ltd.'s gross profits, deeming it a deliberate device to reduce the company's profit for calculating bonuses.
   
• Mere agency of the holding company
  In Re FG (Films) Ltd [1953] 1 All ER 615, an American film company owned 90% of a British company, which had minimal resources, only £100 in share capital, no physical business premises beyond a registered address, and no employees. When the British company attempted to register a film under the Cinematographic Films Act 1938-1948 as its production, the registration was denied. Vaisey J ruled that the British company lacked the means to produce the film and acted as an agent for the American company.
   

Similarly, in Smith, Stone & Knight Ltd v. Birmingham Corporation [1939] 4 All ER 116, Birmingham Corporation sought to acquire property owned by Smith, Stone & Knight (SSK), used by its wholly-owned subsidiary, Birmingham Waste Co. Ltd. The court determined that Birmingham Waste Co. operated as an agent for SSK, entitling SSK to compensation.

These cases illustrate how courts assess the relationship between parent companies and subsidiaries, particularly when the latter appears to act as an agent for the former.

Statutory Provisions

1. Section 3(A) - Reduction in the Statutory Limit: Under Section 3(A) of the Indian Companies Act 2013, if a public company continues business for more than six months with fewer than seven members or a private company with fewer than two, any member aware of this fact during that period becomes jointly and severally liable with the company for debts incurred after the six months. Only members who remain beyond this period can be held liable.
   
   
2. Section 7(7) - False or Suppression of Material Facts to Get the Company Incorporated: Section 7(7) of the Act states that if a company is incorporated through false information, concealment of material facts, or fraudulent methods, the Tribunal can take action and issue orders as deemed appropriate for regulating the company's management. This may include removing the company from the register of companies, ordering its winding up, or taking any other action in the interest of the company, its members, and creditors.
   
   
3. Section 12 - Misdescription of Name: As per Section 12 of the Companies Act, a company must have its name printed on documents like promissory notes and bills of exchange. Suppose an officer of the company signs a cheque or money order and the company's name is either missing or incorrectly stated. In that case, the officer may be personally liable to the holder. For instance, in Hendon v. Adelman (1973), the signatory directors were held personally liable because the company's name was incorrectly written as "LR Agencies Limited" instead of its correct name, "L & R Agencies Ltd." Additionally, both the company and its defaulting officer may be fined up to one thousand rupees for each day the default continues, with a maximum penalty of one lakh rupees.
   
   
4. Sections 34, 35, 36 - Misstatement in the Prospectus and Civil and Criminal Liability: In cases of misrepresentation in a prospectus, the company, along with every director, promoter, expert, and person who authorized the issue, is liable to compensate those who suffer losses from subscribing based on false statements (Section 35). Additionally, these individuals may face imprisonment from six months to ten years and fines ranging from the amount involved in the fraud to three times that amount (Sections 34 and 447). However, they can avoid conviction by proving that the misstatement or omission was insignificant or that they had reasonable grounds to believe it was true at the time of the prospectus issuance. Case: Sir Dinshaw Maneckji Petit Bari.
   
   
5. Section 39 - Allotment of Securities and Returning the Application Money: The rule governing this is the Prospectus and Allotment of Securities Act, 2014 (Allotment of Securities Rules, 2014). After issuing a prospectus to the public with a specific amount and as per Rule 11 of the Prospectus and Allotment of Securities Act, 2014, 90% of the money should have come within 30 days. If not, then within 15 days they have to return all the application money, and failure to do so will lead to lifting the corporate veil.
   
   
6. Section 339 - Winding Up the Company to Defraud the Creditors: For winding up the company, a meeting would be conducted in which 75% of members should vote in favor of winding up. Then, the application for winding up would be sent to NCLT, asking for the appointment of a liquidator. If the liquidators found any suspicion in documents (like defraud of creditors, etc.), the liquidator would file for arbitration in the NCLT, and the corporate veil will be lifted, making the members also liable.
   
   
7. Section 73 or 76 - Deposit Received to Defraud the Depositors: If a company accepts, invites, or allows others to accept or invite deposits in violation of the prescribed conditions under Section 73 or Section 76, or if it fails to repay the deposit or interest within the specified or extended time allowed by the Tribunal, the company faces a fine ranging from one crore to ten crore rupees. Additionally, every defaulting officer of the company may be punished with up to seven years of imprisonment, a fine between twenty-five lakh and two crore rupees, or both. If it is proven that the officer knowingly or willfully violated these provisions with the intent to deceive the company, shareholders, depositors, creditors, or tax authorities, they may also face action under Section 447.
   
   
8. Section 224(5) - Reports by the Investigator that the Company Has Committed Fraud: An inspector appointed to investigate a company's affairs for alleged mismanagement or oppressive practices may, if necessary for completing their investigation, also look into the affairs of another company within the same group or under the same management.

Conclusion
The doctrine of the corporate veil is not subject to any special rule but applies to going through the facts and circumstances of the case based on the gravity of the issue involved in the case as seen in the statute and judgments discussed in the paper above. And it is evident that for lifting the corporate veil there are no such clauses.

Those who benefit from incorporation must ensure the company's capital structure is appropriate for its size. They should not deplete corporate assets or mix personal funds with corporate accounts. Courts have occasionally used such actions as grounds to hold shareholders liable.

Lifting the thin line between the company and its members which now can be removed by the court and can take the appropriate actions according to it, this doctrine of the corporate veil is considered a broad concept in which there are no clauses in which the veil will be lifted but it depends upon the court based on the facts of the case. The categories mentioned above in the paper in which the corporate veil would be lifted are not just on which the court will lift the corporate veil but are the most peculiar basis on which the court would do so and are not exhaustive.

Written by: Nandini Agrawal, BBA LLB, UPES Dehradun, 3rd year