Robert Louis Stevenson

Within the same body there exists more than one distinct personality

CORPORATE VEIL DOCTRINE - A FERTILE GROUND FOR ACADEMIC RESEARCH?

Created to Prevent Injustice?

• The corporate veil doctrine is generally called

• Cracking open the corporate veil/shell

• Lifting the blanket/mask

• Piercing the real façade

UK U.S. India

Lifting of the corporate veil

Piercing of the corporate veil

Both

The “veil” of the “corporate fiction,” or The “artificial personality” of the corp. is “pierced,” and The Individual or corporate SH exposed to personal or corporate liability When a court determines that the debt in question is not really a debt of the corp., but ought, in fairness, to be viewed as a debt of the individual or corporate SH or SH’s. Stephen B. Presser, Piercing The Corporate Veil § 1.01, at 1-6 (1998)

Dr. Dayananda Murthy C P

Gower & Davies on Principles of Modern Company Law

“When the corporate personality is being blatantly used as a cloak for fraud or improper conduct”

Pennington: Company Law “Where the protection of public interests is of paramount

importance or where the co. has been formed to evade obligations imposed by the law”

S. Ottolenghi Prof. of Law in “From peeping behind the Corporate Veil, to ignoring it completely” says

“The concept of ‘Piercing the Veil’ in the US is much more developed than in the UK… “When the notion of legal entity is used to Defeat Public Convenience, Justify Wrong, Protect Fraud, or Defend Crime, the law will regard the corp. as an ‘Assn. of persons’.

European Jurisdictions have accepted this principle

Professor L. Maurice Wormser“Piercing the Veil of Corporate Entity” Columbia Law Review, 496, 517 (1912).

What general rule, if any, can be laid down? “When the conception of corporate entity is employed to

Courts will draw aside the web (i.e., veil) of entity, will regard the corporate Co. as an association of live, up-and-doing, men & women SH’s, & will do justice between real persons.”

Delhi Development Authority v Punjab National Bank 1981 DLR 4 (Del).

• The courts ‘lift the mask of personality’, as it is put, to look to the realities that lie behind…. Done in order to take account of conduct, particularly the performance & non - performance of duties, which can only be of individuals… Courts look at the flesh & look actors behind the corporate facade

Doctrine has always been fact specific & open-ended.

Veil piercing is where much of the action is for lawyers to exercise some care in forming the corp. & advising the client as to its conduct.

Dr. Dayananda Murthy C P

1.Evasion/violating of the legal obligations? Gilford Motor Co Ltd v Horne (1933) Ch 935 Clause 9 – “Not to solicit customers of the Co. - if he were

to leave employment” Setup - JM Horne & Co Ltd, (Wife & Howard SH’s &

directors) - 8 April 1932 “Spares & service for all models of Gilford vehicles. 170

Hornsey Lane, Highgate, N. 6. Opposite Crouch End Lane... No connection with any other firm.”

“Formed as a device, a stratagem, in order to mask the effect carrying on of a business of Mr EB Horne. The purpose of it was to enable him, under what is a cloak or sham, to engage in business which, on consideration of the agreement…’ was one the former employers would object to.”

VTB Capital plc v Nutritek International Corp, Marshall Capital Holdings Ltd, Marshall Capital LLC, Konstantin Malofeev, [2012] EWCA Civ 808

Jones & Another v Lipman & Another (1962) 1 WLR 832

Lipman - Entered into a contract to sell registered land to Jones Repented of the bargain - Before completion – Sold to a Co. which he formed)

(control - Acquired a few days after the plaintiffs had served him with a notice to complete.

Jones sued for specific performance against both defendants Mr Lipman wholly controlled the Co., he was in a position to

procure it to perform the contract by which he was & remained bound.

“Co. is the creature of Lipman, a device & a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity. Gilford’s case illustrates that an equitable remedy is rightly to be granted directly against the creature in such circumstances… The proper order to make is an order on both the defendants specifically to perform the agreement between the plaintiffs & Lipman .”  

A PUPPET COMPANY ?

PNB Finance Limited v Shri Shital Prasad Jain and Others, AIR 1982 DEL 125

PNB Finance Limited -instituted a suit for the recovery of Rs. 19, 55, 890.37

“Doctorine of piercing the corporate veil may be invoked whenever necessary by the court in the interest of justice –

To prevent the corporate entity from being used as an instrument of fraud, &

the fundamental principle of corporate personality itself may be disregarded having regard to the exigencies of the situation & for the ends of justice.”

What is the Colour of a Legal Person?Columbia Law Review, [Vol. 106:2023

People's Pleasure Park Co. v. Rohleder. 1909. [63 S. E. 981.]  Corporation  was  a  person  only in  law,  and  “in law, 

there  can  be  no such thing  as  a  coloured  corporation.”

Thinket Ink Info. Res., Inc. v. Sun Microsystems, Inc., 368 F.3d 1053, 1059 (9th Cir. 2004)

Corporation can acquire “an imputed racial identity’); Bains LLC v. Arco Prod. Co., 405 F.3d 764, 770 (9th Cir. 2005) Pourier v. S.D. Dep’t of Revenue, 2003 SD 21, 21, 6 N.W.2d 395,

404 Holding corporation was “enrolled member” of Indian tribe), affd in part, rev’d in part on other grounds, 2004 SD 3, 674

N.W.2d 314, cert. denied, 541 U.S. 1064 (2005).

Dhulia Amalner Motor Transport Ltd. v Raychand Rupsi Dharamsi (1952) 22 Comp Cas 306 (Bom): AIR 1952 Bom 337

Partners of a firm - Business of plying busesFormed a Pvt. Ltd. Co. & Sold to it their own buses Other partners had legal right to sue for

accounts of the business?Co. was altogether a third person & had an

entity of its own with a perpetual succession.

• Daimler Co. . Cont’l Tyre & Rubber Co. (Great Britain) Ltd., [1916] 2 A.C. 307 (H.L.)

• “But it can assume enemy character when persons in de facto control of its affairs are residents in any enemy country or, wherever resident, are acting under the control of enemies.

• Held that the company was an enemy company for the purpose of trading & therefore it was barred from maintaining the action.”

A plot of land was put to auction by the DDA (1980) Skipper offered the highest bid in a sum of Rs. 9.82

crores (record bid at that time) Conditions of auction, 25% of the amount was payable immediately & Rest

within 90 days. Skipper deposited the 25% - not the balance. Asked for extension repeatedly & Granted repeatedly. (7

extensions granted – From January 1981 to April 1982) Skipper failed – Proceedings were taken for cancelling the bid. Skipper went to court - 29/5/1982 - Stay of cancellation DDA applied for vacating the stay. Nothing happened but

usual adjournments. Committee – Revised agreement with Skipper

Delhi Development Authority v Skipper Construction Co. Pvt. Ltd. AIR 1996 SC 2005, 1996 (4) SCC 622;

DDA v Skipper Construction Co

• Skipper - Selling the place (proposed building) to various persons & receiving monies (1987)

• Installment under the revised agreement – Delayed payment• Bank guarantees furnished - Found to be defective• HC - order permitting Skipper to commence construction (1990) (Writ by

Skipper)• DDA filed Special Leave Petitions• 21-12-1990 Final hearing - HC order - Directed - Skipper to pay to DDA Rs.

8,12,88,798 (30 days) & stop construction with effect from 9-1-1991 till payment was made.

• In default – Licence would stand determined & DDA would be entitled to re-enter the plot. Which it failed to pay?

• 29-1-1991 - Skipper – Spl. Leave Petition (SC) – Interim order permission to deposit money was granted.

• SC - Prohibited from inducting any person in the building and from creating any rights in favour of third parties.

• Skipper issued an advertisement on 4-2-1991 in the leading newspapers of Delhi inviting persons to purchase the space in the proposed building

• Ultimately Spl. Leave Petition dismissed on 25-1-1993

After 29-1-1991 – Skipper – Advertised & collected 11 Crores - agreeing to sell the space in the said building.

Same space was sold to more than one person and monies collected. Skipper violate - orders of the SC (29-1-1991 by issuing

advertisements,) 1993 - Filed a suit in the DH Court seeking an injunction restraining

the DDA from interfering with its alleged title & possession over the plot and for a declaration that the re-entry by DDA was illegal and void.

Granted - Interim orders staying re-auction of the plot DDA – SLP (1993) SC - Noticing the conduct of Skipper - Initiated suo motu contempt

proceedings against - Tejwant Singh – Surinder Kaur (Wife) – BOD of Skipper.

Asked to explain (1) why did they institute Suit No. 770 of 1993 in respect of the very same subject-matter which was already adjudicated by this Court on 23-1-1993 and

(2) why did they enter into agreements for sale & create interest in the third parties in defiance of the orders of this Court dated 29-1-1991?

DDA v Skipper Construction Co

• Co’s created by Tejwant Singh, his wife & children - Merely fronts & devices to defraud & defeat the claims of the purchasers.

• For doing complete justice between the parties, - Corporate veil should be lifted & all the said properties, which have already been attached, should be proceeded with to realise the amounts necessary for paying - Pre 29-1-1991 purchasers in full (i.e., interest) & the post-29-1-1991 purchasers.

DDA v Skipper Construction Co

B. P. Jeevan Reddy & K. S. Paripoornan in Para 37

“Before parting with this case, we feel impelled to make a few observations. What happened in this case is illustrative of what is happening in our country on a fairly wide scale in diverse forms.

Some persons in the upper strata (which means the rich and the influential class of the society) have made the “property career” the sole aim of their life.

The means have become irrelevant - in a land where its greatest son born in this century said “means are more important than the ends.”

A sense of bravado prevails; everything can be managed; every authority and every institution can be managed.

All it takes is to ‘tackle’ or ‘manage’ it in an appropriate manner. They have developed an utter disregard for law - nay, a contempt for

it; the feeling that law is meant for lesser mortals and not for them.

The courts in the country have been trying to combat this trend, with some success as the recent events show.

But, how many matters can we handle. How many more of such matters are still there?

The real question is how to swing the polity into action, a polity which has become indolent and soft in its vitals?

Can the courts alone do it? Even so, to what extent, in the prevailing state of affairs?

Not that we wish to launch upon a diatribe against anyone in particular but Judges of this Court are also permitted, we presume, to ask in anguish, “

“What have we made of our country in less than fifty years”?

Where has the respect and regard for law gone? And who is responsible for it?

Para 38“…A person purchases a property in auction. He does not pay as per the stipulated terms. He obtains a series of extensions. Still he doesn’t deposit and when the vendor

proposes to cancel the allotment, the court is approached and it stays the cancellation.

The vendor (DDA) applies for vacating it but nothing happens except repeated adjournments. This has happened more than once.

We find that as and when Skipper was not able to manage the DDA, he approached the court and it provided him a breather.

He then gets time to manage the DDA.

This went on up to the end of 1990 when fortunately the Delhi High Court came with a tonne of bricks upon Skipper & which order was affirmed two years later by this Court.

Ultimately, no doubt, Skipper has met its nemesis but meanwhile hundreds of persons are cheated out of their hard-earned monies; their dreams of owning a flat are shattered rudely.

39. ALL THIS MEANS THAT EACH OF US IN THIS LAND SHOULD WAKE UP TO HIS DUTY AND TRY TO LIVE UP TO IT. WE DO NOT THINK WE NEED SAY MORE.”

DHN Food Distributors Ltd. v. London Borough of Tower Hamlets (1976) 1 W.L.R. 741

Lord Denning quoted with approval the statement in Gower’s Co. law that

“There is evidence of a general tendency to ignore the separate legal entities of various companies within a group, & to look instead at the economic entity of the whole group”.

…This group is virtually the same as a partnership in which all the three co’s are partners”. He called it a case of “three in one” and, alternatively, as “one in three”

Cited in DDA v Skipper Construction

New Horizons Ltd. v Union of India (1995) 1 Comp LJ 100 (SC) (1995) 1 SCC 478

Even where two Co’s form a partnership by entering into a JV agreement & incorporate a Co. with their SH’ing (popularly known as ‘JVC’), the third entity is a Co. with an independent legal entity though in the nature of a partnership; it is a not a partnership firm but a Co.

(But if is not incorporated as a Co., it is just a partnership & not a Co.)

The SC’s observation in Gammon India Ltd v Commissioner of Customs 2011 AIR SCW 4175, that a partnership formed by two Co’s but not registered as a Co’ U/T/CA is a ‘legal entity i.e. juridical person’ does not seem to be correct, since from the facts of the case as appearing in the reported judgment the JV was not a Co. incorporated U/T/CA unlike in the New Horizons case.

Amit Products Ltd. v Chief Engineer (O & M)(2005) 127 Comp Cas 443 (SC)

Co. - Seeking electricity connection under the guise of separate corporate body

In respect of the same premises - Already there was electricity connection in its name

In respect of which a default in paying the electricity charges was committed by it.

SC held that by changing the members of the BOD or by changing the SH’ing pattern, the appellant Co. cannot be said to have undergone any change.

Co. cannot be said to be a different entity than earlier one.

TELCO Ltd. v State of Bihar (1964) 34 Comp Cas 458 (SC); AIR 1965 SC 40.

• Corporation in law is equal to a natural person & has a legal entity of its own.

• Entity of the corporation is entirely separate from that of its shareholders; it bears its own name and has a seal of its own; its assets are separate and distinct from those of its members; it can sue and be sued exclusively for its own purpose; its creditors cannot obtain satisfaction from the assets of its members; the liability of the members or shareholders is limited to the capital invested by them; similarly, the creditors or the members have no right to the assets of the corporation

Trebanog Working Men's Club and Institute, Ltd v. MacDonald, (1940) 1 KB. 576 at 582 (Eng.). (Court did not pierce the veil to find SH liability, but separate corporate personality was set aside nonetheless. Specifically, the court found that the incorporated co. was acting as an unincorporated trustee for the alcohol of its members, and therefore did not represent an illegal sale by a distinct (incorporated) legal entity)

Rainham Chemical Works, Ltd. v. Belvedere Fish Guano Co (1921) 2 A.C. 465 (H.L.)

Statutory Lifting of Corporate veil

• Section 45 • Members severally liable for debts where business carried on

with fewer than seven, or in the case of a private company, two members

• Section 147 (Sec 12 – 2013)• Publication of name by company • (8) If any default is made in complying with the requirements - the Co &

every officer who is in default shall be liable to a penalty of Rs. 1000 for every day during which the default continues – Not exceeding Rs. 1 lakh

• Section 212 -213• Balance-sheet of holding company to include certain particulars

as to its subsidiaries;• Financial year of holding co & subsidiary• Section 542• Liability for fraudulent conduct of business

453 Punishment for improper use of “Limited” or “Private Limited” That Person/Each of those persons shall

unless duly incorporated with limited liability, or unless duly incorporated as a private company with limited liability,

Punishable with fine which shall not be less than Rs. 500 but may extend to Rs. 2000 for every day for which that name or title has been used.

• Apthorpe v. Peter Schoenhofen Brewing(1899) 15 T.L.R. 245 (A.C.)

Salomon v Salomon (1897) A.C. 22 (H.L.)Woolfson v Strathclyde Regional Council (1978)

S.C.(H.L.) 90Gilford Motor Co. v Horne, [1933] Ch. 935

(A.C.) at 956 (Eng.) (Piercing the veil for attempting to evade a legal obligation);

In re Darby, Brougham, [1911] 1 KB. 95 (Eng.) (Piercing the veil because of misrepresentation).

• If all of them are citizens of India the company does not become a citizen of India any more than if all are married the company would be a married person. personality of the members has little to do with the persona of the incorporated company. The persona that comes into being is not the aggregate of the personae either in law or in metaphor. The corporation really has no physical existence; it is a mere “abstraction of law”

• State Trading Corporation of India Ltd. v CTO (1963) 33 Comp Cas 1057 (SC), per Hidayatullah J.

• Each company registered under the Act is a separate and distinct legal entity and the mere fact that two companies have common shareholders or common directors does not make them a single entity

• Indowind Energy Ltd v Wescare (I) Ltd 2010 AIR SCW 2884: AIR 2010 SC 1793

Macaura . v Northern Assurance Co., (1925) A.C. 619 (H.L.)

• Upholding the separate legal personality of Macaura’s co. despite his complete control and ownership, resulting in his inability to collect on his insurance policy;

• Gramophone & Typewriter, Ltd. v. Stanley, (1908) 2 K.B. 89 (A.C.) at 96 (Eng.) - Upholding separate personality of a wholly owned subsidiary, & holding that complete share ownership does not automatically turn a subsidiary into a parent Co’s agent.

• Beckett Investment Management Group v. Hall (2007) EWCA (Civ.) 613, (2007) I.C.R. 1539 (A.C.) 1545 (Maurice Kay L.J.) (Eng.).

• Stone & Rolls Ltd. v Moore Stephens (2009) UIKHL 39, (2009) 1 A.C. 1391