An incorporated company, from its very inception, is treated as a separate legal entity – firmly entrenched in its autonomous structure – distinguishing itself from its board of directors, shareholders and employees. This attribute of a company of possessing a “separate legal personality” was laid down in 1897 by the House of Lords in Salomon v. A. Salomon and Co. Ltd.^[1]  Furthermore, the Court of Exchequer in Bligh v. Brent^[2] held that “the individual members of a corporation are quite as distinct from the metaphysical body called the corporation”.

The culmination of such rulings and interpretations meant that the promoters and directors of the company were bestowed the advantage of neither shouldering the responsibility nor being made liable for the company’s debts, with the obvious exceptions of company policy and the restrictions imposed by relevant statutory provisions. In essence, companies were conferred the status similar to that of a person with their own existence and could therefore sue and could be sued. Nevertheless, at the same time, the shareholders and the directors remained the ultimate beneficiaries of the dividends accruing from the company. This protection bequeathed upon the shareholders protection from the actions and consequences of the company and this has been metaphorically termed as a ‘corporate veil’.

However, a stark increase in cases of corruption, initiation of fraudulent activities or ponzi schemes and the facilitation of companies as a forefront for other illegal activities, whilst the perpetrators hid under this ‘corporate veil’ – the law protecting or absolving such members of the company of such liability, pushed the Courts towards a re-interpretation of the same. Ergo, it was from this notion that the waters of the principle of ‘limited liability’ were tested and the concept of ‘piercing or lifting the corporate veil’ arose.

The objective of this paper is to understand and analyse this notion of a ‘corporate veil’ and under what circumstances it may be ‘pierced’ or ‘lifted’ by the courts and shall subsequently conduct a comparative study with respect to how the theme has been dealt with in India and other common law countries. 

Part I of the paper, will briefly introduce the theme and shall be dwelling into the history of the company as a ‘separate legal personality’ and shall be setting-up the rest of the paper. Part II of the paper shall be dealing with the development of the doctrine of a ‘separate legal personality’ with the passage of time. After delving into the history of the theme and shall attempt to answer the questions of when, how and why both – (a) the institution of the ‘corporate veil’ and (b) the necessity of ‘piercing this corporate veil’ – arose in the first place. Part III will deal in length with the theory of ‘piercing of the corporate veil’. The evolution of the concept in India, especially through legislative changes of relevant statutory provisions shall be analysed in Part IV of the paper. Part V shall exclusively deal with judicial interpretations of the same, through a thorough examination of the relevant case laws and precedents established by the Hon’ble Courts. The final part – Part VI – aims at a comparative analysis with respect to the relevant legislations and statutory interpretations between India and the common law countries of the United Kingdom, the United States of America and Singapore.

COMPANY AS A SEPARATE LEGAL PERSONALITY¹

The history of modern company law in England began all the way back in 1844 with the passing of the Joint Stock Companies Act.^[3] This was gradually replaced by the Companies Act of 1862. With further passage of time the Acts soon became a conglomeration of a multiverse of concepts – including the notion of a company as a ‘separate legal entity’ that was introduced in order to combat the persisting problem of companies and their shareholders going bankrupt and thus derailing business during the highly lucrative era post the Industrial Revolution to ensure that the instability and uncertainty surrounding the running of companies was alleviated. However, human ingenuity soon found new ways to circumvent and defraud these provisions for monetary gains as the legal framework absolved them of any legal responsibility or liability. Ergo, the need arose to prevent certain members of companies from being absolved of responsibility.

The principle of the ‘veil of incorporation’, wherein the company was deemed as a separate legal entity, distinct from its members was instituted through the landmark verdict as delivered by the House of Lords’ in the case ofSalomon v. Salomon & Co. Ltd.^[4]

The plaintiff – Mr. Aaron Salomon – in consideration for a certain sum – transferred his manufacturing business to Salomon & Co. Ltd. (the respondents) – a company which he himself had incorporated. He further received debentures worth ten thousand GBP as shares in the company. Post the sale – as the business collapsed – Mr. Aaron Salomon made a claim of recovery, with regard to his debentures, that he be considered as a secured creditor. However, the liquidator, on behalf of the unsecured creditors, contended that Mr. Aaron Salomon must not be deemed to be on an equal footing with the other creditors and that the company was “a sham” as in actu, “the company and Mr. Aaron Salomon were aliases – one and the same” or, in other words, post the sale to the company, business was carried on Mr. Aaron Salomon’s behalf.

On subsequent appeal, the House of Lords, in holding that once a company is incorporated as an artificial person, it must be given the same status as that of an independent person with his rights and liabilities, held the company – Salomon & Co. Ltd. to not be a mere “sham” as was purported by the creditor and declared that the debts of the corporation would not be deemed as the debts of Mr. Aaron Salomon for the very reason that they were in fact two ‘separate legal entities’. Lord Macnaghten observed:

“The company is at law a different person altogether from the subscribers to the memorandum, 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 receive the profits, the company is not in law the agent of the subscribers or trustee for them.” ^[5]

Notably, the House of Lords in the subsequent judgements of – Gas Lighting Improvement Co. Ltd. v. Inland Revenue Commissioners,^[6] Macaura v. Northern Assurance Co. Ltd.,^[7] and Lee v. Lee’s Air Farming^[8] – reiterated and furthered the judicial support for the principle wherein a company was deemed as an individual and separate legal entity’.

The Australian Courts followed suit by advancing the ‘separate entity concept’ with the decisions in the cases of Hobart Bridge Co. Ltd. v. Federal Commissioner of Taxation^[9] and Industrial Equity v. Blackburn.^[10] Relying on Lord Sumner’s extract in the Gas Lighting Improvement judgement, Kitto, J. in the Hobart Bridge case^[11] applied this principle by summarising the courts position as:

“Between the investor, who participates as a shareholder, and the undertaking carried on, the law imposes another person, real though artificial, the company itself, and the business carried on is the business of that company, and the capital employed is its capital and not in either case the business or the capital of the shareholders. Assuming, of course, that the company is duly formed and is not a sham …”^[12]

In addition to this the Australian High Court comparatively quite recently in Industrial Equity v. Blackburn^[13]held that preventing a holding company from treating its subsidiary’s profits as its own is the principle’s modus operandi. 

Ergo, it may be thus construed from the aforementioned judgements set as precedent by, but not restricted to, the United Kingdom and Australian Courts that the ‘separate entity principle’ continues to be held at the highest authority. In all these judgements the courts operated on a basis of only deciding the respective cases in front of them 

Nevertheless, what is pertinent to note, is that all the courts merely adjudicated their respective cases on the merits and facts of each case and accordingly found in favour of a ‘company as a legal person’, upholding the principle – wherein adjudging otherwise would be against the very notion of a company as a separate legal personality, distinct from its members. However, whilst doing so, none of the Courts in these judgements in actu considered the limitations of this principle of a company as a ‘separate legal person’ or elucidated a comprehensive and designated set of guidelines in setting out to identify the same.

DEVELOPMENTS TO THE PRINCIPLE OF SEPARATE LEGAL PERSONALITY

It is however, pertinent to note that multiple verdicts have suggested that there exist certain possible exceptions to the concept of companies as a separate entity. Lord Halsbury laid out in that such a scenario might come into existence provided there was “no evidence of fraud and no agency and if the company was a real one and not a fiction or myth.”^[14] This garb behind which corporations veiled themselves gradually began to come loose with the judgements in the cases of United States v. Milwaukee Refrigeration Transit Company^[15] and subsequently in Littlewoods Mail Order Stores Ltd. v. Inland Revenue Commissioners^[16] wherein it was held by the Circuit Court of Wisconsin that:

“A corporation will be looked upon as a legal entity as a general rule but 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.”^[17]

And later in the United Kingdom by Lord Denning that:

“The doctrine laid down in Salomon v. Salomon and Salomon Co. Ltd, has to be watched very carefully. It has often been supposed to cast a veil over the personality of a limited liability company through which the Courts cannot see. But, that is not true. The Courts can and often do draw aside the veil. They can and often do, pull off the mask. They look to see what really lies behind”.^[18]

It is from a further research and analysis of these and other similar judgements and the extenuating circumstances in which they were delivered that light is shed on the two general reasons behind the existence of certain such exceptions to the separate entity principle. 

Firstly, despite a corporation being a legal person, it is impossible to always treat it as the independent person it masquerades as. For instance, although a company is prima facie ‘a legal person’, it is incapable of the commission of a crime or tort that demands proof of mens rea unless the Courts disregard such status conferred and digress to test the intention of the members of such company – namely its’ board of directors, employees and shareholders. The Courts’ intention in ensuring that no unjust decision is delivered from the existence of the corporate firm is visibly apparent through an exhaustive understanding of the cases of – Whitford Beach Pvt. Ltd. v. Financial Commissioner of Taxation,^[19] Re Chisum Services Pvt. Ltd.,^[20] H.L. Bolton (Engineering) v. T.J. Graham & Sons Ltd.^[21]  and Daimler Company Ltd. v. Continental Rubber and Tyre Co. (Great Britain) Ltd.^[22] – wherein the aforementioned test was employed. 

Secondly, a watertight application of the principle of ‘separate legal personality’ may lead to outcomes not in pursuit of justice or might mislead the courts in cases wherein the party in question might “hide behind the veil of limited liability”

In essence, it may be gathered from the aforementioned findings and analysis that in certain scenarios the doctrine of a company as a ‘separate legal entity’ by might be misused and a strict interpretation and application of the same by the judiciary might not be in interest of justice. Therefore, in certain extenuating circumstances wherein it might be reasonably deduced that the separate entity principle is being grossly misused, judicial intervention and legislative action might be ushered in to ensure that no injustice or harm is inflicted upon any party who deals either internally or externally with the such company as would be deemed to be against the furtherance of the pursuit of justice.

‘PIERCING THE CORPORATE VEIL’ : THE CONCEPT

With the passage of time, as the loopholes within the existing legal framework became more apparent, human ingenuity indulged in the blatant abuse of employing the company’s separate personality as a front for executing fraudulent, illegal and improper conduct. As such activities were increasingly discovered by legal mechanisms and became more apparent to the eyes of the masses, there arose the need for the law governing bodies to intervene and ‘break this shield’ or ‘remove the garb’ under which the perpetrators hid and investigate accordingly to extend necessary liability to the real beneficiaries of such corporate fiction. Although this principle had been nebulously put into practice by the courts, in 1912, the term ‘piercing the corporate veil’ was first appeared in an article published by Columbia Law’s Professor Maurice Womser.^[23]

Piercing the corporate veil’ – also referred as the ‘lifting of the corporate veil’ – is a widely used doctrine in company law. It is employed in cases wherein there arises reasonable suspicion pertaining the commission of illegal, malfeasant or fraudulent activities by a company. This doctrine may be made use of to disregard the separate corporate personality of a company and decide if liability can be extended to the real beneficiaries of the company – its’ directors and shareholders. The Courts in the United States of America and the United Kingdom have set precedent in the aforementioned cases of United States v. Milwaukee Refrigeration Transit Company^[24] and Littlewoods Mail Order Stores Ltd. v. Inland Revenue Commissioners^[25] by elucidating that the judiciary may intervene in certain scenarios wherein there is information regarding the commission of malfeasant, fraudulent and illegal wherein although by fiction of law, a corporation is indeed a distinct legal entity, yet in actu it is an association of certain beneficiaries of the company’s dividends. 

The doctrine of piercing the corporate veil – also understood as “the Court’s unwillingness to permit corporate presence and action to divert judicial course of applying law to ascertain facts” in contemporary works^[26] – when invoked, makes it permissible to circumvent the principles of limited liability and the company as a juristic person; and make liable the directors and shareholders of a company for their acts of malfeasant and misfeasance. In such cases, it entails that the Courts assume that the impugned corporate entity is a “sham” for the perpetration of the commission of fraudulent activities and to avoid liability from fulfilling the contract and from falling under the ambit of relevant statutes.^[27]

The Supreme Court of India in the case of Skipper Construction Company Pvt. Ltd., observed that: 

“The concept of corporate entity was evolved to encourage and promote trade and commerce but not to commit illegalities or to defraud people. The corporate veil indisputably can be pierced when the corporate personality is found to be opposed to justice, convenience and interest of the revenue or workman or against public interest.”^[28]

Justice Chinappa Reddy in the case of Life Insurance Company of India v. Escorts Ltd.^[29] had emphasised that the corporate veil must be pierced where the associated companies are inextricably connected in such a manner that they must deemed as part of one concern. This theory was only strengthened post the Bhopal Gas tragedy and subsequent judgements such as the Renusagar Power case.^[30]

This doctrine of piercing the corporate veil was derived as a limitation to the principle that absolved investors and shareholders of any liability of their corporation beyond the amount of their investment. This modern-day rendition of the concept of limited liability accentuates the elimination of three primary forms of transaction costs. The first type are the costs that are accrued from individual shareholders and creditors keeping an eye on the monetary losses and gains of other shareholders. The monitoring of such risks of management actions make up the second type of costs and complexities pertaining the same. The third and final type of costs take root in the concept of limited liability which facilitates the shareholders to diversify their investments and simultaneously decreases the cost of such processes.^[31][32] The culmination of limiting such transaction costs is that limited liability serves in fulfilling the dual-purpose of facilitating the operation of equity markets and encouraging investment.

Eminent academicians Henry Hansmann and Reiner Kraakman have in their commentaries asserted that the sphere of limited is in fact a fragment of the wide-ranging phenomenon of ‘asset partitioning’ which, in assuring creditors that such assets shall be safeguarded from the other investors of the creditor, serves imperative social interests. However, there is a high consensus among academicians and experts in the field that limited liability is not justifiable in tort cases or in cases where the claim arises from statutory duties instead of obligations under common law.^[33]

Another concern that arises from this study is that although, corporate law in its conventional sense has not elucidated separately – the rules for individual investors and parent companies when acting as a shareholder – the fact remains that different policy issues come up when dealing with parent companies and thus, issues pertaining their limited liability and economic role must be dealt with differently. To permit the shareholders to operate within the domain of limited liability bestows upon them the power to demarcate some of the ‘risks of doing business’ to third parties.^[34] The judiciary employs the doctrine of piercing the corporate veil whilst supervising the risk allocation decision.

The piercing of the corporate veil continues to be one of the most debated doctrines in the realm of corporate law. The academicians and commentators however are nearly unanimous that the current framework of rules and guidelines facilitate poor decision making and are inconsistent and inept in dealing with the perpetrators and many reformatory proposals have been put forth considering the judiciary’s reluctance in establishing a comprehensive set of guidelines for the same as can be observed through the discernible movement in relevant case laws.

THE GROUNDS UNDER WHICH THE CORPORATE VEIL MAY BE PIERCED

The Courts through judgements dating as far back as Solomon v. Solomon^[35] – with Lord Halsbury acknowledging the principle and at the same time elucidating that there “must not be any fraud or agency and that the company must be a real one, and not a fiction or myth” – have hinted at the possible exceptions to the ‘separate entity principle’. In many similar cases, the Courts have often ‘pulled off the veil and have sought to see what in actu lay shielded behind.’^[36]

The situations wherein the veil may be lifted can be broadly categorised under two categories: 

(a) Under statutory provision of law and (b) Under judicial interpretations.

A.   UNDER STATUTORY PROVISIONS OF LAW

The Companies Act, 2013 lays out the conditions under which the corporate veil may be lifted, and the individual members and directors of a company may be made liable for certain malfeasant and illegal act. The statutory provisions are as follows:

1.     Reduction of membership below the statutory minimum (Section 45):

Section 45 of the Companies Act, 2013^[37] lays down that if the number of members of a company falls below seven persons (for public companies) and two persons (for private companies) and the company nonetheless carries on business, every single person who is aware of this and continues to remain as a member of such company, will be made liable in case the company accrues any debts.

2.     Improper use of name (Section 147):

Section 147(4) of the Companies Act, 2013^[38] elucidates that an officer of the company who signs any bill of exchange, hundi, promissory note or cheque wherein the company’s name is not mentioned in the specified format shall be held to be personally liable to such holder of these aforementioned instruments unless it is duly paid for by the company.

3.     Liability for fraudulent conduct of business (Section 542):

In scenarios where the company is being winded-up and reasonable apprehension is raised pertaining the running of the business with an intention to defraud the creditors of the company or for any other such fraudulent purpose, the persons who were knowingly parties to the carrying on of the business, in the aforesaid manner, shall be made personally liable by virtue of section 542 of the Companies Act, 1956^[39] for all or any of the debts or liabilities of the company, in the manner that shall be deemed fit by the Courts of Law. 

B.    UNDER JUDICIAL INTERPRETATIONS

The piercing of the corporate is said to take place when the Court circumvents the legal personality of a company and decides to deal directly with its members. Nevertheless, it remains a very daunting task to determine when exactly this veil may be pierced, prompting academician Warner Fuller to remark that “it is impossible to ascertain the factors which operate to break down the corporate insulation.”^[40] Despite certain statutory provisions, the issue continues to be left at the discretion of the Courts  and depends upon the “underlying social, economic and moral factors as they operate in and through the corporation.”^[41] Additionally, it must be noted that “the adherence to the Solomon principle will not be doggedly followed where this would cause an unjust result”.^[42] In such a scenario, seven grounds have been established for lifting the veil of a corporate entity.

1.     Fraud or Improper Conduct

Among all the other grounds under which the veil may be pierced, the Courts have been most prepared for the same in cases where they form the impression that the corporation has become a front for the commission of a fraudulent or improper activity. The cases of Gilford Motor Company Ltd v. Horne^[43] and Jones v. Lipman^[44]are characteristic to the application of the fraud exception.

In the first case, the contract of Mr. Horne – an ex-employee of the Gilford Motor Company – provided that he could not solicit the company’s customers post termination of his employment. However, in order to circumnavigate this provision, he incorporated a Limited Liability Corporation in the name of his wife and solicited the customers of the company, causing the Gilford Motor Company to file a lawsuit against him. The Court of Appeal however held it to be apparent “that the main purpose of incorporating the new company was to perpetrate fraud.” Ergo, the Court of Appeal ruled in favour of the Gilford Motor Company deeming Mr. Horne’s company to be a “mere sham to cloak his wrongdoings.”

The second case of Jones v. Lipman^[45] pertains to the sale of a piece of land as the seller changed his mind and transferred the same to a company after initially agreeing to the sale in order to evade an order of specific performance. Russel, J. referred to the Gilford v. Horne judgement and held the company to which the land was transferred to be “a mask which (Mr. Lipman) holds before his face in an attempt to avoid recognition by the eye of equity” and ordered specific performance against Mr. Lipman and the Company.

The Courts shall not permit under any circumstance the abuse of the corporate form and in cases where there is evidence that the same has been committed, the Courts must step in. The three main questions pertaining to fraud that must be investigated upon before the lifting of the corporate veil are: 

(a)  The relevancy of the motives of the fraudulent person 

The primordial issue that arises is whether there exists a certain level of deception that needs to be determined for lifting the corporate veil. The Court in Hilton v. Plustile Ltd.^[46] held that the complainant was not permitted to demand the lifting of the corporate veil, as he in connivance with the defendant agreed to form a company to evade certain provisions of the Rent Act.

Another interesting issue accruing from this debate was what was the effect of deception on the other party and this issue came up for consideration in the case of Adams v. Cape Industries Plc.^[47] The Court, whilst considering whether the corporate form was used in such a manner as to justify the piercing of the corporate veil, observed that the correct test in relation to a group of companies pertained to whether the company had been used as “a mere façade, concealing the true facts”. Justice Slade asserted that the “motives of the perpetrator may be highly material” as seen in both the classic cases, there was a clear intention to deceive the complainant. However, such an intention was absent in Adams v. Cape Industries.^[48] Thus, the crux of the matter is to decipher whether the ‘motive in question’ is a requisite for the existence of the exemption to fraud.

(b)  The relevancy of the character of the legal obligation being evaded 

The chief purpose of courts with respect to this matter is the prevention of limited liability companies from utilising the ‘separate corporate entity’ doctrine to escape the fulfilment of a contractual or legal obligation as was seen in most of the classic cases. Yet, the quintessential question in this regard would be whether the nature of this obligation will affect the ability of the court to lift the corporate veil.

In the case of Adams v. Cape^[49] there was a debate surrounding whether the lifting of the veil should be permissible in consideration of the publicity that would culminate from the piercing, which it was argued would have a negative impact on the trade of Cape. However, this tortious liability was purely speculative. For the fraud exception to exist, the defendant must deny a pre-existing legal right of the defendant. 

In cases wherein, it is determined that the legal right crystallises before the incorporation of the company, then the mental element is put to test and in other cases, whether such mental element may be satisfied. The answer to this question might lie in the finding that if the legal right manifests post the incorporation but earlier to the use of the corporate veil to evade the fulfilment of such legal right, then the exception to fraud shall lie satisfied.

(c)   The relevancy of the timing of incorporation of the subsidiary company 

In the case of Creasey v. Breachwood Motors Limited,^[50] the causal reason behind the fraud exception not standing in Court was that the time of incorporation of the company that was deemed to be a “sham”. The complainant brought an action of wrongful dismissal against the respondents – his former employers, to which they served a defence. However, four months later the complainant received a notice claiming that the company was insolvent. The respondents themselves took over all the business, under the veil of another company, not extending to the plaintiff’s claim and later the company was dissolved without the process of liquidation.

It is pertinent to note, that although the facts of this case are prima facie similar to Adams v. Cape Industries,^[51] yet Justice Southwell referred to Gilford v. Horne^[52] and Jones v. Lipman^[53] on the ratio that in these cases, the “sham companies” had been formed with the task of further facilitation of such fraud. Through the course of investigation, it was unearthed that the respondents were in fact already ‘in business’ and had carried out the same in the ordinary course of business. This judgement has received due critique from eminent academicians and jurists alike who opine that the issue of whether the subsequently formed company was created to avoid their legal obligations or if they were already in existence and should have been simply been decided on the grounds of a justiciable claim.

2.     Group Enterprises

The principle established by Lord Halsbury^[54] need not be abided in cases of group enterprises and the Court may pierce the veil in consideration of the economic realities of the group itself. The judgements in the cases of D.H.N. Food products Ltd. v. Tower Hamlets London Borough Council,^[55] Hackrbridge Hewitt and Easun Ltd. v. GEC Distribution Transformers Ltd,^[56]and Fatima Tile Works v. Sudarsan Trading Co. Ltd,^[57] have permitted that the decision in Solomon v. Solomon may be disregarded when and where the need to do so arises. Lord Denning himself observed that “in many respects a group of companies are treated together for the purpose of accounts, balance sheet, and profit and loss accounts.” The nature of control and shareholding would serve as indicators in determining whether the Court would pierce the corporate veil. The House of Lords in the case of Woolfson v. Stratchlyde Regional Council^[58] adjudged that whilst applying the principle “it is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere facade concealing the true facts.”

However, in certain cases, the Court desisted from piercing the veil such as those of Adams v. Cape Industries,^[59] wherein the Court held that a thorough investigation had led them to believe that each company in this group was a separate entity. Although it isn’t possible in the absence of a relationship of agency or trust to deem one group liable for the debts of the others, in the United States of America, New Zealand and Ireland the equitable doctrine is applied and there exists statutory provisions pertaining the pooling of assets.

3.     Agency

In situations wherein, the company acts as an agent for its shareholder, the shareholders will be made liable for the company’s acts. A similar stance was taken up by Justice Vaughan Williams who had expressed that “the company was nothing more than an agent of Solomon.”^[60] A company, if authorised to do so may act as an agent for the sake of their parent company or its members. The Court in the case of R.G. Films^[61] – held an American company who had financed a film made in India by a British company to be an American company as the British company merely acted as a nominee of the American Company. 

4.     Trusts

The Courts have in the past pierced the corporate veil for further investigating the characteristics of the shareholders as seen in the case of Abbey and Planning^[62] where the veil was lifted to investigate the terms on which the shares of a school were held by its trustees.

5.     Tort

The English Courts have not lifted the veil on grounds of any claim arising out of a tort and most of the common law countries, inclusive of India have followed suit. The High Court of Quebec in Canda is the only exception to this norm.

6.     Taxation

At certain times tax legislations warrant the lifting of the corporate veil. In such cases wherein there is a reasonable enough apprehension that the company is violating tax laws on the counts of tax evasions or other liberal schemes of tax avoidance, the Courts must intervene to disregard the ‘separate legal personality of a company’ and bring the perpetrators to justice. In the case of Sir Dinshaw Manekjee Petit^[63] – a millionaire who had formed four private companies and transferred his dividends and investments to each of these companies in exchange for their shares and transferred back these shares on the pretext of a loan – the Court stepped in and pierced the corporate veil and held the assessee to be guilty of tax evasion. A similar verdict was delivered in the case of Commissioner of Income Tax v. Meenakshi Mills Ltd.^[64]

7.     Enemy Character

In times of war, the corporate veil may be lifted when a company is operated by or is majorly owned by a country against whom arms are taken up against. This was observed in the Daimler case^[65] where the corporate veil of a tire manufacturing company whose majority shareholders were all German was lifted by British Court during the First World War and the company was held to be possessing “an enemy character.”

ELEMENTS OF A PIERCING CLAIM

Although there is an apparent lack of statutes governing ‘corporate veil-piercing’, the courts have through precedents established certain instances when there would be a valid piercing claim. This three-pronged test has been devised in such a manner that the complainants must prove in order for the Courts to pierce the corporate veil. These elements have been commonly characterised as:

• Control and Domination
• Improper purpose or use
• Resulting in harm or damage

However, it must be noted that in reality, the process is not as simple as it seems and is sometimes difficult to put these concepts to practice.

1. CONTROL AND DOMINATION

The first part of the ‘control and domination’ element scrutinises the relationship between the corporation and the shareholders as was observed in White v. Jorgenson^[66] and Multimedia Publishing v. Mullins.^[67]  In most cases, the evidence of a majority stock ownership in itself is insufficient to satisfy the element of ‘control and domination’. Rather, what remains to be proven is that there is a complete and total domination in not just the financial domain but also over the executive actions, through its policy making and implementation, in such a manner that it’s proven beyond reasonable doubt that such corporate entity has no separate or individual mind of its’ own.  

Whilst determining whether “complete domination” exists, the Courts generally require the complainant to submit evidence of one^[68] or more^[69] components that prove the control of the person in question. The followingly is a non-exhaustive list of circumstances frequently relied upon by the court of law to establish whether there is an existence of such requisite ‘degree of control’: 

1. Inadequate capitalization or undercapitalization;
2. Commingling of funds;
3. Sole or majority stock control;
4. Parent finances subsidiary;
5. Failure to follow corporate formalities;
6. Sharing of corporate employees;
7. Identity of directors and officers;
8. Subsidiary has substantially no business except with the parent company or no assets other than those conveyed to it by the parent; Papers of the parent corporation describe the subsidiary as a department of the parent;
9. The directors or officers of the subsidiary do not act independently in the subsidiary’s interest but, rather, take their orders from the parent company in the parent’s interest;
10. The utilisation of the subsidiary company’s property as its own by the parent company;  
11. The diversion of assets or funds for purposes non-corporate in nature;  
12. The payment of all forms of expenses incurred, including the salaries of the subsidiary’s employees by the parent company. 
13. The subscription of all the capital stock of the subsidiary or its’ incorporation by the parent company.^{[70][71] [72]}

Most of these precursors are often used to prove the existence of ‘control and domination’ of a person or a group of persons in a company. Since these indicators are self-explanatory and indulging in an exhaustive explanation of the same would culminate in a digression from the original train of thought, the author shall not be dwelling further into the matter for the sake of relevance and brevity.

2. IMPROPER PURPOSE OR USE

This aspect of the three-pronged test demands the complainant to prove that the control exercised by the party in question was “used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal right.”^{[73] [74] [75] [76] [77]} This aspect of investigative process gives weight to the relationship between the complainant and the corporation. There lies an explicit understanding that a form of improper conduct must have taken place beyond ascertaining that the corporation was controlled and dominated as per the first test.^[78]

In many cases where the claim of piercing of the corporate veil has succeeded, the requisite of ‘morally culpable conduct’ has been observed in many scenarios including the commission of torts,^{[79] [80] [81] [82]} undercapitalising with intent to defraud creditors,^[83] and other such violations of legislations.

3. RESULTING DAMAGE

The third and final aspect of the three-pronged test demands that the plaintiff must prove that the person in question whilst exercising his control over the corporation partook or indulged in the commission of a fraudulent, illegal or unfair act that resulted in damages or harm caused. 

However, in cases where the damage caused to the complainant is not culminative of any conduct by the defendant corporation, the complainant has not met his burden. “The fact that the corporate veil could be disregarded for some purposes does not mean that it must be disregarded for all purposes.” The Courts must exercise care to balance the opposing goals of company dividends and protecting creditors. Lastly, as seen in the case of J. M. Thompson Co. v. Doral Mfg. Co.^[84] the complainant must prove that the control and acts complained of coalesced at the same time as the harm.

A COMPARITIVE ANALYSIS BETWEEN INDIA AND OTHER COMMON LAW COUNTRIES

As the world under the cusps of capitalism becomes increasingly commercialised, there are an increasing number of companies and thus it is imperative for the State to pass certain legislations and impose certain sanctions to ensure that such companies don’t indulge in acts of malfeasance and misfeasance. Thus, over time through legislative interpretations and judicial interventions, the issue of lifting the corporate veil has been answered by different countries differently.

However, for the purposes of this research paper, the author shall be restricting himself to a comparative analysis between India and the common law countries of the United Kingdom, the United States of America and Singapore for sake of lucidity, convenience and brevity.

A.   THE UNITED STATES OF AMERICA

The piercing of the veil of corporate entities is one of the more heavily litigated matters in the realm of corporate law in the United States of America and it would be fair to state that among the countries analysed, the United States judiciary tries the maximum number of veil piercing cases. Nonetheless, an empirical study has proven that only around forty percent of these claims are successful.^[85] The demarcation of such cases – although in certain cases overlapping or not strictly falling under the ambit of the same – might be classified to be scrutinised as under the situations pertaining individual shareholders and those pertaining to parent-subsidiary relations.

An intensive analysis pertaining to individual shareholders drives us towards its three overarching themes namely: ‘the control and domination of a company’, ‘undercapitalisation’ and ‘the commingling of assets’ and ‘the disregarding of the notion of corporate families’. With respect to the former, it has however, been observed that the courts have been hesitant to extend liability towards individual shareholders with respect to acts that fall under the ambit of the corporations’ responsibility. Tertiary factors such as ‘undercapitalisation’ and the ‘commingling of assets and disregard to the notion of corporate families’ have also been cited as elements of when the veil may be pierced.^[86] [87] The judiciary also has to adjudge a large number of piercing claims in parent-subsidiary relationships, which was discussed previously.^[88]

The judiciary in their verdicts tend to rely more on precedents rather than existence of a ‘black-letter law’ or a ‘bright-line test’ which despite the colossal number of piercing cases continues to perplexingly be absent from the legal framework and rather relies on concepts derived from prior precedents such as the presence of ‘wrongful conduct’, ‘proximate cause’ and ‘the unity of interest and ownership’.^[89] [90] The case of United States v. Milwaukee Refrigerator Transit Company^[91] which, as discussed in length previously, held that the piercing may be commissioned in cases where it would be egregious to the justice clause to not do so.

What is strikingly apparent of the confederate structure of the United States would be that of the difference with respect to the treatment of veil piercing cases. For instance, research shows that Nevada courts are more stringent and conservative in the application of veil piercing in comparison to Californian courts who have a much more liberal approach towards the same, so much so, that it remains the only state to permit reverse piercing – a practice that is prohibited in all the other forty-nine states.^[92]

B.    UNITED KINGDOM

In contrast with the United States, the Courts in the United Kingdom appear more hesitant to pierce the veil, many still staunch believers of the conservative ‘separate legal personality’ characteristic of companies. Nonetheless, the United Kingdom’s judiciary due to the prevalence of ‘common law’ has a lot of commonalities with the American laws on veil-piercing. The usage of terms such as “sham”^[93] and “alter-ego”^[94] in common parlance under both American and United Kingdom judgements.

Furthermore, the United Kingdom courts have also invoked the justice clause as to when ‘veil-piercing’ may be commissioned by the Courts of law in certain extenuating circumstances as was held in Creasy v. Breachwood Motors Ltd,^[95]and as was discussed above, the same principle was put to practice in the Milwuakee Mail Transit case.^[96]Furthermore, both jurisdictions permit ‘veil-piercing’ in cases of a high-degree of control by the shareholder or when there is an intentional act of fraud.^[97]

Despite certain such commonalities, it is seen that the Courts in the United Kingdom are generally reluctant to pierce the veil as was held in the landmark judgement of the Littlewoods Mail Order Stores case^[98] as was discussed earlier.

The cases of Prest v. Petrodel Resources Ltd.^[99] and VTB Capital v. Nutritek International Corp.^[100] are the current precedent that is followed by the United Kingdom courts and have come out in support of a broader veil lifting approach for the satisfaction of the justice clause.^[101]

C.   SINGAPORE

The Singaporean Courts, like the United Kingdom Courts have a more conservativve approach towards ‘veil-piercing’ and are somewhat reluctant to disregard the ‘separate legal characteristic’ of a company. The Singapore Court of Appeal recently in Goh Chan Peng v Beyonics Technology Ltd^[102] reiterated that veil piercing would generally only be justified where there is an abuse of the corporate form or if the same is necessary to give effect to a legislative provision. The Singaporean Courts have also ruled on ‘reverse-piercing’ as was seen in the case Jhaveri Darsan Jitendra and others v Salgaocar Anil Vassudeva and others^[103] an individual who asserted that he was the beneficial shareholder of certain companies had sought to supplant the company’s separate legal character and attempted to treat assets held by the companies as belonging to him. This was effectively an attempt to effect “reverse veil piercing” and the Singapore High Court rejected this attempt at reverse veil piercing and took the opportunity to clarify the categories of corporate veil piercing and to reiterate the rationale underlying the doctrine of veil piercing.^[104] It is due to this decision that there exists in Singapore, the maximum rules pertaining ‘veil piercing’ which the cases of Alwie Handoyo v. Tjong Very Sumito^[105] and Raffles Town Club Pte Ltd. v. Lim Eng Hock Peter.^[106] It however, must be noted that due to the absence of ‘argument by counsels’, there is lesser analysis of the legal principles in the Singaporean Courts.^[107]

D.   INTERNATIONAL CONTEXT

In addition to statues and judicial decisions as precedents, this concept of ‘piercing the veil’ has been addressed at certain international forums on two fronts – namely, under the ambit of liability under Criminal Law and under Environmental Law. In 1985, the United Nations Congress on the Prevention of Crime and Treatment of Offenders declared that the liability of making the perpetrators of such offences criminally responsible lay extended to the member states in taking appropriate measures so as to deter the commission of such acts in the future.^[108]

The Council of Europe in 1985 ratified the measures under the Convention on the Protection of the Environment through Criminal Law, which facilitated the taking of criminal or administrative sanctions to hold corporate firms accountable for damage to the environment.^[109]

E.    INDIA

India being a ‘common law’ country has heavily borrowed legal philosophies pertaining to the lifting of the corporate veil from the United Kingdom and the United States of America’s Courts. The Indian courts however, have established certain principles, especially in cases pertaining to parent-subsidiary relationship.

One of the most important cases pertaining to the nexus between parent and subsidiary companies is the case of State of Uttar Pradesh v. Renusagar Power Company^[110]  wherein the holding company – Hindalco and the subsidiary company – Renusagar were deemed to be “one and the same” and thus the court facilitated the piercing of the veil. In another similar case, the Life Insurance Corporation of India v. Escorts Ltd.,^[111] Justice O. Chinappa Reddy adjudged that the corporate veil must be pierced in cases wherein the holding company and the subsidiary company were inextricably linked. 

It was held in the case of Development Authority v. Skipper Construction Co. (P) Ltd. also holds a high value of precedence. It was held that the ‘separate legal characteristic’ of a company should be disregarded in cases wherein an individual or a group of individuals use the corporate entity as a front for the commission of illegal activities.

CONCLUSION

Over the course of time, Legislations and Courts all around the world have struggled to develop and come to a consensus over a comprehensive set of guidelines pertaining to the doctrine of piercing the corporate veil which till date, isn’t scrutinised to any bright line tests. Rather there is heavy dependence on precedents and the concepts evolved from them. However, it must be noted that every new action or claim initiated in the Courts of law brings forth a unique set of facts and circumstances, adding to the already comprehensive pool of precedents.

Through a thorough analysis and understanding, it may be gathered that the decision whether to pierce the corporate veil should be aided, at least in part, by qualified experts and eminent jurists in the field. Such expert testimony would be of great assistance in determining whether the company has been capitalised adequately for the purpose it was intended to fulfil. Nonetheless, the judgement whether to disregard the corporate entity shall ultimately be dependant on the balancing of a plethora of aspects, all or some of which would be deemed imperative for the piercing or lifting of the corporate veil. The Court of Appeal’s judgement in the case of Adams v. Cape^[112] may be understood as the current and most recently adjudicated precedent, necessary for this purpose, which ultimately is a rendition of Lord Halsbury’s verdict in the Solomon case.^[113] This pushes the answer to quintessential question flirted with throughout the essay, that the judiciary will lift the corporate veil only and exclusively in cases where there is reasonable apprehension of a grave abuse of the corporate form.

In addition to this, with regard to the judicial trends established, if there exists one overriding principle in all piercing the veil cases, it is that each case must be adjudged exclusively on its merits and facts as was seen in a multitude of cases including Las Palmas Associations v. Las Palmas Comptrollers^[114], Sampson v. Hunt,^[115]Kansas Gas & Electrical Co. v. Ross^[116] and Schalter v. Haynie^[117] and as no two cases with an identical set of facts and extenuating circumstances may exist.

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^[2] Bligh v. Brent (2 Y & C Ex. 268) (1837)

^[3] The Joint Stock Companies Act, 1844.

^[4] Salomon v. Salomon & Co. Ltd. (1897) AC 22.

^[5] Salomon v. Salomon & Co. Ltd. (1897) AC 22.

^[6] Gas Lighting Improvement Co. Ltd. v. IRC (1923) A.C. 723, 741.

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^[12] Gas Lighting Improvement Co. Ltd. v. Inland Revenue Commissioner (1923) A.C. 723, 741.

^[13] Industrial Equity v. Blackburn (1977) 52 A.L.J.R. 89. 

^[14] Salomon v. Salomon & Co. Ltd. (1897) AC 22.

^[15] United States v. Milwaukee Refrigeration Transit Company 142 F.247 (1906). 

^[16] Littlewoods Mail Order Stores Ltd. v. Inland Revenue Commissioner (1969) 1 W.L.R. 1241, 1254.

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^[19] Whitford Beach Pty. Ltd. v. FCT (1982) 150 C.L.R. 355.

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^[24] United States v. Milwaukee Refrigeration Transit Company 142 F.247 (1906). 

^[25] Littlewoods Mail Order Stores Ltd. v. IRC (1969) 1 W.L.R. 1241, 1254.

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^[36] Littlewoods Mail Order Stores Ltd. v. IRC (1969) 1 W.L.R. 1241, 1254.

^[37] Section 45 of the Companies Act, 2013.

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^[87] DeWitt Truck Brokers v. W. Ray Fleming Fruit Co., 540 F.2d 681 (4th Cir.1976).

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^[93] Marcelino Tan v. Jose Renato Lim G.R. No. L-27730.

^[94] Security Exchange Ltd. v. Gordon, Transcript of Hearing, Oct. 7, 1988 (C.A.).

^[95] Creasy v. Breachwood Motors, Ltd, [1993] BCLC 480, [1992] BCC 638 (Q.B.).

^[96] United States v. Milwaukee Refrigeration Transit Company 142 F.247 (1906).

^[97] Wallersteiner v. Moir, 2 All E.R. 217, 1 W.L.R. 991 (C.A. 1974).

^[98] Littlewoods Mail Order Stores Ltd. v. Inland Revenue Commissioner (1969) 1 W.L.R. 1241, 1254.

^[99] Prest v. Petrodel Resources Ltd. [2013] 2 AC 415.

^[100] VTB Capital v. Nutritek International Corp. [2013] UKSC 5

^[101] Stephen Bull, “Piercing the Corporate Veil—in England and Singapore.” Singapore Journal of Legal Studies, 2014, pp. 24–40. JSTOR.

^[102] Goh Chan Peng v Beyonics Technology Ltd [2017] 2 SLR.

^[103] Jhaveri Darsan Jitendra and others v Salgaocar Anil Vassudeva and others [2018] SGHC 24.

^[104] ‘Singapore High Court Rejects Attempt By Company Insider To Pierce The Corporate Vei’

 <http://www.conventuslaw.com/report/singapore-high-court-rejects-attempt-by-company/&gt; accessed 12^th October 2018.

^[105] Alwie Handoyo v. Tjong Very Sumito (2013) 4 S.L.R. 308 (C.A.).

^[106] Raffles Town Club Pte Ltd. v. Lim Eng Hock Peter (2013) S.L.R.  374 (C.A.).

^[107] Stephen Bull, “Piercing the Corporate Veil—in England and Singapore.” Singapore Journal of Legal Studies, 2014, pp. 24–40. JSTOR.

^[108] ‘Guiding Principles for Crime Prevention and Criminal Justice in the Context of Development and a New International Economic Order’, <http://www.un.org/documents/ga/res/40/a40r032.htm>  29 November 1985, accessed on 12th October 2018.

^[109] ‘Convention on the Protection of the Environment through Criminal Law’, <http://conventions.coe.int/Treaty/en/Treaties/Html/172.htm>  4 November 1998, accessed on 12th October, 2018.

^[110] State of Uttar Pradesh v. Renusagar Power Company (AIR 1988 SC 1737).

^[111] Life Insurance Corporation of India v. Escorts Ltd., AIR 1986 SC 1370.

^[112] Adams v Cape Industries Plc [1990] Ch. 433 (CA (Civ Div).

^[113] Salomon v. Salomon & Co. Ltd. (1897) AC 22.

^[114] Las Palmas Assocs. v. Las Palmas Ctr. Assocs., 1 Cal. Reporter. 2d 301, 317 (Cal. Ct. App. 1991);

^[115] Sampson v. Hunt, 665 P.2d 743, 751 (Kan. 1983); 

^[116] Kansas Gas & Elec. Co. v. Ross, 521 N.W.2d 107, 112 (S.D. 1994).

^[117] Schlater v. Haynie, 833 S.W.2d 919, 925 (Tenn. Ct. App. 1992).