When court will apply doctrine of lifting of corporate veil?
Company (P) Ltd (1996) 4 SCC 622, it was observed :
“24. Lifting the corporate veil :
In Aron Salomon v. Salomon & Company
Limited (1897) AC 22, the House of Lords had
observed, "the company is at law a different
person altogether from the subscriber...; and
though it may be that after incorporation the
business is precisely the same as it was before
and the same persons are managers and the same
hands received the profits, the company is not in
law the agent of the subscribers or trustee for
them. Nor are the subscribers as members liable,
in any shape or form, except to the extent and in
the manner provided by that Act". Since then,
however, the Courts have come to recognise several
exceptions to the said rule. While it is not
necessary to refer to all of them, the one
relevant to us is "when the corporate personality
is being blatantly used as a cloak for fraud or
improper conduct". (Gower : Modern Company Law -
4th Edn. (1979) at P. 137). Pennington (Company
Law - 5th Edn. 1985 at P. 53) also states that
"where the protection of public interests is of
paramount importance or where the company has been
formed to evade obligations imposed by the law",
the court will disregard the corporate veil. A
Professor of Law, S. Ottolenghi in his article
"From Peeping Behind the Corporate Veil, to
Ignoring it Completely" says
"the concept of 'piercing the veil' in
the United States is much more developed
than in the UK. The motto, which was
laid down by Sanborn, J. and cited since
then as the law, is that 'when the
notion of legal entity is used to defeat
public convenience, justify wrong,
protect fraud, or defend crime, the law
will regard the corporation as an
association of persons. The same can be
seen in various European jurisdictions".
[(1990) 53 MLR 338]. Indeed, as far back 1912,
another American Professor L. Maurice Wormser
examined the American decisions on the subject in
a brilliantly written article "Piercing the veil
of corporate entity" (published in (1912) 12 CLR
496) and summarised their central holding in the
following words :
“The various classes of cases where the
concept of corporate entity should be
ignored and and veil drawn aside have
now been briefly reviewed. What general
rule, if any, can be laid down ? The
nearest approximation to generalization
which the present state of the
authorities would warrant is this: When
the conception of corporate entity is
employed to defraud creditors, to evade
an existing obligation, to circumvent a
statute, to achieve or perpetuate
monopoly, or to protect knavery or
crime, the courts will draw aside the
web of entity, will regard the corporate
company as an association of live, upand-doing,
men and women shareholders,
and will do justice between real
persons.”
25. In Palmer's Company Law, this topic is
discussed in Part-II of Vol-I. Several situations
where the court will disregard the corporate veil
are set out. It would be sufficient for our
purposes to quote the eighth exception. It runs :
"The courts have further shown
themselves willing to 'lifting the veil'
where the device of incorporation is
used for some illegal or improper
purpose.... Where a vendor of land
sought to avoid the action for specific
performance by transferring the land in
breach of contract to a company he had
formed for the purpose, the court
treated the company as a mere 'sham' and
made an order for specific performance
against both the vendor and the
company".
Similar views have been expressed by all the
commentators on the Company Law which we do not
think it necessary to refer.”
(underlining is ours)
26. It is thus clear that the doctrine of lifting the veil can
be invoked if the public interest so requires or if there is
allegation of violation of law by using the device of a
corporate entity. In the present case, the corporate entity has
been used to conceal the real transaction of transfer of mining
lease to a third party for consideration without statutory
consent by terming it as two separate transactions – the first
of transforming a partnership into a company and the second of
sale of entire shareholding to another company. The real
transaction is sale of mining lease which is not legally
permitted. Thus, the doctrine of lifting the veil has to be
applied to give effect to law which is sought to be
circumvented.
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL No. 434 OF 2016
(ARISING OUT OF SLP (CIVIL) NO.23311 OF 2015)
STATE OF RAJASTHAN & ORS …APPELLANTS
VERSUS
GOTAN LIME STONE KHANJI UDYOG PVT. LTD.
& ANR. ...RESPONDENTS
Citation; AIR 2016 SC 510
ADARSH KUMAR GOEL, J
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