Concept of Lifting Corporate Veil Under Companies Act 2013

Concept of Lifting Corporate Veil Under Companies Act 2013. The word ‘company’ is derived from the combination of two Latin words, namely ‘com’ and ‘panis’. The word ‘com’ means ‘together’ and ‘panis’ means ‘bread’ Thus initially the word ‘company’ referred to an association of persons who took their meals together. The merchants in the leisurely past took advantage of these festive gatherings to discuss their business matters. Initially, the word ‘Company’ did not have strictly technical or legal meaning.
Broadly speaking, the word company connotes two ideas in a legal sense:-

The members of the association are so many that it cannot aptly be described as a firm or a partnership; and

A Member may transfer his interest in the association without the consent of other members. Such an association may be incorporated according to law; thereupon, it becomes a body corporate or what is usually called a corporation with perpetual succession and a common seal. It is then regarded as a legal person separate and distinct from its members.

According to the ruling in Salomon vs. Salomon and Co. (1897) in common law, a company is a legal person or legal entity separate from, and capable of surviving beyond the lives of its members. The company is not merely a legal institution. It is rather a legal device for the attainment of any social or economic end and to a large extent publicly and socially responsible. It is therefore, a combined political, social economic and legal institution.
Nature of Company
A company is an artificial legal person. It does not take its birth like a natural person but is created by the process of law alone. It is invisible, intangible and amoral because it has no body, no soul and no conscience. Still some rights of a natural person have been given to it. As a rule, a company may acquire and dispose of property, it may enter into contracts, may be fined for the contravention of the provisions of Company Act. So, for most legal purposes a company is a legal person just like a natural person, who has rights and duties at law. In short, it may be said that a company being an artificial legal person can do everything like a natural person, except of course that, it cannot take oath, can not appear in its own person in the court, cannot be sent to jail, cannot practice a learned profession like law or medicine, nor can it marry or divorce like a natural person.
However, it will be noteworthy here whether company is a citizen or not like a natural person. Article 19 of the constitution of India secures rights giving six fundamental freedoms. Yet Article 19 does not specify whether these rights are available to juristic persons like incorporated bodies. In S.I. Corporation of India Ltd. Vs Commercial Tax Officer1, the Apex Court held that companies are not citizens within the meaning of Article 19. 'Citizens' under Article 19 mean only natural persons having the status of citizenship under the Law. In fact, a thorough examination of the essential features of a company will make the nature of it clearly understandable which are as follows:
Concept of lifting corporate veil
Once a company is formed and registered as per law, it is a separate legal entity from its members. Further it has been established by the judiciary also that a company is a quite distinct legal personality from the persons who have formed it. House of Lords has also observed it in a very famous case namely Solomon Vs Solomon and Company Ltd. But there are certain exceptions to this fundamental principle of separate corporate personality, where the veil is lifted or pierced and the identity of the members is revealed. It means that where the law disregards the corporate entity and pays regard instead to the individual members behind the legal facade due to certain situations or circumstances, it is known as lifting the veil of corporate personality. This simply means that there are circumstances when the members, directors or certain persons can be made personally liable for the debts or acts of the company.
Circumstances to lift the corporate veil
 The corporate veil can be lifted either under the

Statutory provisions or

Judicial interpretations

The statutory provisions are provided under the Companies Act, 2013. The other circumstances are decided through Judicial interpretations, which are based on facts of each case as per the decisions of the court.
Statutory Recognition of Lifting of Corporate Veil
 The Companies Act, 2013 itself contains some provisions which lift the corporate veil to reach the real forces of action.

Section 7(7) deals with punishment for incorporation of company by furnishing false information;

Section 251(1) deals with liability for making fraudulent application for removal of name of company from the register of companies and

Section 339 deals with liability for fraudulent conduct of business during the course of winding up.

It should be noted here that lifting the corporate veil can be done in two different ways:

By keeping the company intact and making the members liable. This happens when the corporate veil is lifted by an express provision in an enactment.

By destroying the company itself as a sham. This happens when the court holds that the corporate device is used as camouflage (Cover).

When can Corporate Veil of a Company be Lifted 
For all purposes of law a company is regarded as a separate entity from its shareholders. But sometimes it is sometimes necessary to look at the persons behind the corporate veil. The separate entity of the company is disregarded and the schemes  and intentions of the persons behind are exposed to full view which is known as lifting or piercing the corporate veil. This is usually done in the following cases
1) Determination of real character of a company: In times of war, it may become necessary to lift the corporate veil of a company to determine whether the company has an enemy character. In Daimler Co Ltd. v. Continental Tyre and Rubber Co., a company was incorporated in England for the purpose of selling tyres manufactured in Germany by a German company. The German company held the bulk of the shares in the English company and all the directors of the company were Germans, resident in Germany. During the First World War the English company commenced an action to recover a trade debt. And the question was whether the company had become an enemy company and should therefore be barred from maintaining the action. The House of Lords held that though the company was registered in England it is not a natural person with a mind or conscience. It is neither loyal nor disloyal; neither friend nor enemy. But it would assume an enemy character if the persons in de facto control of the company are residents of an enemy country.
2) To prevent evasion of taxation: The separate existence of a company may be disregarded when the only purpose for which it appears to have been formed is the evasion of taxes. In Sir Dinshaw Maneckjee, Re7, the assessee was a wealthy man enjoying large dividend and interest income. He formed four private companies and agreed with each to hold a block of investment as an agent for it. Income received was credited in the company accounts but company handed the amount to him as pretended loan. Thus he divided his income in four parts to reduce his tax liability. The Court disregarded corporate entity as it was formed only to evade taxes. In Bacha F Guzdar v. CIT, Bombay, the SC rejected the plea of the plaintiff, a member of a tea company, who claimed that the dividend held by her in respect of her shares should be treated as agricultural income(as it was exempted from tax) and not income from manufacture and sale of tea.
3) Avoidance of welfare legislation: where it was found that the sole purpose of formation of new company was to use it as a device to reduce the amount to be paid by way of bonus to workmen, the SC pierced its corporate veil. –The Workmen Employed in Associated Rubber Industries Ltd. v. The Associated Rubber Industries Ltd, Bhavnagar. 
4) Prevention of Fraud or improper conduct: In Gilford Motor Co v. Horne, H was appointed at the managing director of the plaintiff company on the condition that he shall not solicit the customers of the company. He formed a new company which undertook solicitation of plaintiff’s customers. The company was restrained by the Court. 5) Where a corporate façade is really an Agency or Trust- The separate existence of a company may be ignored when it is being used as an agent or trustee. In State of UP v. Renusagar Power Co, it was held that a power generating unit created by a company for its exclusive supply was not regarded as a separate entity for the purpose of excise.
In Re R.G.Films Ltd., an American company produced film in India technically in the name of a British company, 90% of whose share was held by the President of the American company. Board of Trade refused to register the film as the English company acted merely as the agent of the American company.
 6) To punish the real person in Quasi-Criminal cases against the company: The Courts have sometimes applied the doctrine of lifting the corporate veil in quasi-criminal cases relating to companies in order to look behind the legal person and punish the real persons who have violated the law. 
Conclusion
The concept of lifting the corporate veil serves as a crucial exception to the foundational principle of corporate law that a company is a separate legal entity distinct from its members, as affirmed in Salomon v. Salomon & Co. Ltd. While this principle provides businesspersons with limited liability and encourages entrepreneurship, it can sometimes be misused to commit fraud, evade taxes, or bypass legal obligations. In such cases, courts intervene by lifting the corporate veil to hold the real wrongdoers accountable. This doctrine ensures that the corporate form is not exploited as a tool for injustice or illegality. Though applied sparingly and only in exceptional circumstances, it is a powerful judicial tool to ensure fairness, transparency, and protection of public interest in corporate dealing.
If you have any queries regarding Company Registration, Trademark Registration, Business License for any products, then you can connect with Compliance Calendar LLP experts through email info@ccoffice.in or Call/Whatsapp at +91 9988424211.
Frequently Asked Question 
Q1. What does lifting the corporate veil mean? 
Ans. Lifting the corporate veil refers to a legal decision where the court disregards the separate legal personality of a company and holds the shareholders or directors personally liable for the company’s actions or debts. It is an exception to the rule in Salomon v. Salomon. 
Q2. When is the corporate veil lifted?
Ans. The veil is lifted in situations involving fraud, dishonesty, or where the company is being used as a cover to avoid legal obligations or to commit wrongdoing. Courts intervene to ensure justice and fairness.
Q3. Is the veil lifting a common practice? 
Ans. No, courts are generally reluctant to interfere with the principle of separate legal personality. Veil lifting is rare and applied only in exceptional circumstances where misuse of the corporate form is clearly established.
Q4. Who can lift the corporate veil?
Ans. Only courts have the authority to lift the corporate veil. They do so when legal evidence suggests that the corporate structure is being misused for unethical or illegal purposes. 
Q5. What is a sham or façade company? 
Ans. A sham or façade company is one that is set up solely to disguise the true nature of a transaction or to avoid legal responsibilities. Such companies are not functioning as genuine businesses but rather as tools for deception. 
Q6. Can tax evasion lead to veil lifting? 
Ans. Yes, if a company is formed or used for the purpose of evading taxes, courts can lift the veil to identify and penalize the individuals involved, as seen in cases like Re Dinshaw Maneckjee Petit. 
Q7. Is the veil lifted in group companies? 
Ans. In group companies or subsidiaries, the veil may be lifted if one company is merely acting as an agent or puppet of the parent company, especially when there is no real independence or separate existence. 
Q8. What’s a landmark case on this topic? 
Ans. In Salomon v. Salomon & Co. Ltd., the principle of separate legal personality was established. However, in Gilford Motor Co. v. Horne, the court lifted the veil because the company was used to evade a non-compete clause.
Q9. Does veil lifting apply in criminal cases? 
Ans. Yes, if a company is used to commit a crime, courts can pierce the veil to hold the individuals behind the crime responsible. This ensures that corporate structure is not misused to shield unlawful activities. 
Q10. Can directors be personally liable? 
Ans. Yes, if the veil is lifted, directors and shareholders can be held personally liable for the company’s obligations, especially when they are found guilty of fraud, misrepresentation, or illegal conduct.

The word ‘company’ is derived from the combination of two Latin words, namely ‘com’ and ‘panis’. The word ‘com’ means ‘together’ and ‘panis’ means ‘bread’ Thus initially the word ‘company’ referred to an association of persons who took their meals together. The merchants in the leisurely past took advantage of these festive gatherings to discuss their business matters. Initially, the word ‘Company’ did not have strictly technical or legal meaning.

Broadly speaking, the word company connotes two ideas in a legal sense:-

The members of the association are so many that it cannot aptly be described as a firm or a partnership; and
A Member may transfer his interest in the association without the consent of other members. Such an association may be incorporated according to law; thereupon, it becomes a body corporate or what is usually called a corporation with perpetual succession and a common seal. It is then regarded as a legal person separate and distinct from its members.

Nature of Company

A company is an artificial legal person. It does not take its birth like a natural person but is created by the process of law alone. It is invisible, intangible and amoral because it has no body, no soul and no conscience. Still some rights of a natural person have been given to it. As a rule, a company may acquire and dispose of property, it may enter into contracts, may be fined for the contravention of the provisions of Company Act. So, for most legal purposes a company is a legal person just like a natural person, who has rights and duties at law. In short, it may be said that a company being an artificial legal person can do everything like a natural person, except of course that, it cannot take oath, can not appear in its own person in the court, cannot be sent to jail, cannot practice a learned profession like law or medicine, nor can it marry or divorce like a natural person.

However, it will be noteworthy here whether company is a citizen or not like a natural person. Article 19 of the constitution of India secures rights giving six fundamental freedoms. Yet Article 19 does not specify whether these rights are available to juristic persons like incorporated bodies. In S.I. Corporation of India Ltd. Vs Commercial Tax Officer1, the Apex Court held that companies are not citizens within the meaning of Article 19. 'Citizens' under Article 19 mean only natural persons having the status of citizenship under the Law. In fact, a thorough examination of the essential features of a company will make the nature of it clearly understandable which are as follows:

Concept of lifting corporate veil

Once a company is formed and registered as per law, it is a separate legal entity from its members. Further it has been established by the judiciary also that a company is a quite distinct legal personality from the persons who have formed it. House of Lords has also observed it in a very famous case namely Solomon Vs Solomon and Company Ltd. But there are certain exceptions to this fundamental principle of separate corporate personality, where the veil is lifted or pierced and the identity of the members is revealed. It means that where the law disregards the corporate entity and pays regard instead to the individual members behind the legal facade due to certain situations or circumstances, it is known as lifting the veil of corporate personality. This simply means that there are circumstances when the members, directors or certain persons can be made personally liable for the debts or acts of the company.

Circumstances to lift the corporate veil

The corporate veil can be lifted either under the

Statutory provisions or
Judicial interpretations

Statutory Recognition of Lifting of Corporate Veil

The Companies Act, 2013 itself contains some provisions which lift the corporate veil to reach the real forces of action.

Section 7(7) deals with punishment for incorporation of company by furnishing false information;
Section 251(1) deals with liability for making fraudulent application for removal of name of company from the register of companies and
Section 339 deals with liability for fraudulent conduct of business during the course of winding up.

It should be noted here that lifting the corporate veil can be done in two different ways:

By keeping the company intact and making the members liable. This happens when the corporate veil is lifted by an express provision in an enactment.
By destroying the company itself as a sham. This happens when the court holds that the corporate device is used as camouflage (Cover).

When can Corporate Veil of a Company be Lifted

For all purposes of law a company is regarded as a separate entity from its shareholders. But sometimes it is sometimes necessary to look at the persons behind the corporate veil. The separate entity of the company is disregarded and the schemes and intentions of the persons behind are exposed to full view which is known as lifting or piercing the corporate veil. This is usually done in the following cases

1) Determination of real character of a company: In times of war, it may become necessary to lift the corporate veil of a company to determine whether the company has an enemy character. In Daimler Co Ltd. v. Continental Tyre and Rubber Co., a company was incorporated in England for the purpose of selling tyres manufactured in Germany by a German company. The German company held the bulk of the shares in the English company and all the directors of the company were Germans, resident in Germany. During the First World War the English company commenced an action to recover a trade debt. And the question was whether the company had become an enemy company and should therefore be barred from maintaining the action. The House of Lords held that though the company was registered in England it is not a natural person with a mind or conscience. It is neither loyal nor disloyal; neither friend nor enemy. But it would assume an enemy character if the persons in de facto control of the company are residents of an enemy country.

2) To prevent evasion of taxation: The separate existence of a company may be disregarded when the only purpose for which it appears to have been formed is the evasion of taxes. In Sir Dinshaw Maneckjee, Re7, the assessee was a wealthy man enjoying large dividend and interest income. He formed four private companies and agreed with each to hold a block of investment as an agent for it. Income received was credited in the company accounts but company handed the amount to him as pretended loan. Thus he divided his income in four parts to reduce his tax liability. The Court disregarded corporate entity as it was formed only to evade taxes. In Bacha F Guzdar v. CIT, Bombay, the SC rejected the plea of the plaintiff, a member of a tea company, who claimed that the dividend held by her in respect of her shares should be treated as agricultural income(as it was exempted from tax) and not income from manufacture and sale of tea.

3) Avoidance of welfare legislation: where it was found that the sole purpose of formation of new company was to use it as a device to reduce the amount to be paid by way of bonus to workmen, the SC pierced its corporate veil. –The Workmen Employed in Associated Rubber Industries Ltd. v. The Associated Rubber Industries Ltd, Bhavnagar.

4) Prevention of Fraud or improper conduct: In Gilford Motor Co v. Horne, H was appointed at the managing director of the plaintiff company on the condition that he shall not solicit the customers of the company. He formed a new company which undertook solicitation of plaintiff’s customers. The company was restrained by the Court. 5) Where a corporate façade is really an Agency or Trust- The separate existence of a company may be ignored when it is being used as an agent or trustee. In State of UP v. Renusagar Power Co, it was held that a power generating unit created by a company for its exclusive supply was not regarded as a separate entity for the purpose of excise.

In Re R.G.Films Ltd., an American company produced film in India technically in the name of a British company, 90% of whose share was held by the President of the American company. Board of Trade refused to register the film as the English company acted merely as the agent of the American company.

6) To punish the real person in Quasi-Criminal cases against the company: The Courts have sometimes applied the doctrine of lifting the corporate veil in quasi-criminal cases relating to companies in order to look behind the legal person and punish the real persons who have violated the law.

Conclusion

The concept of lifting the corporate veil serves as a crucial exception to the foundational principle of corporate law that a company is a separate legal entity distinct from its members, as affirmed in Salomon v. Salomon & Co. Ltd. While this principle provides businesspersons with limited liability and encourages entrepreneurship, it can sometimes be misused to commit fraud, evade taxes, or bypass legal obligations. In such cases, courts intervene by lifting the corporate veil to hold the real wrongdoers accountable. This doctrine ensures that the corporate form is not exploited as a tool for injustice or illegality. Though applied sparingly and only in exceptional circumstances, it is a powerful judicial tool to ensure fairness, transparency, and protection of public interest in corporate dealing.

If you have any queries regarding Company Registration, Trademark Registration, Business License for any products, then you can connect with Compliance Calendar LLP experts through email info@ccoffice.in or Call/Whatsapp at +91 9988424211.

Frequently Asked Question

Q1. What does lifting the corporate veil mean?

Ans. Lifting the corporate veil refers to a legal decision where the court disregards the separate legal personality of a company and holds the shareholders or directors personally liable for the company’s actions or debts. It is an exception to the rule in Salomon v. Salomon.

Q2. When is the corporate veil lifted?

Ans. The veil is lifted in situations involving fraud, dishonesty, or where the company is being used as a cover to avoid legal obligations or to commit wrongdoing. Courts intervene to ensure justice and fairness.

Q3. Is the veil lifting a common practice?

Ans. No, courts are generally reluctant to interfere with the principle of separate legal personality. Veil lifting is rare and applied only in exceptional circumstances where misuse of the corporate form is clearly established.

Q4. Who can lift the corporate veil?

Ans. Only courts have the authority to lift the corporate veil. They do so when legal evidence suggests that the corporate structure is being misused for unethical or illegal purposes.

Q5. What is a sham or façade company?

Ans. A sham or façade company is one that is set up solely to disguise the true nature of a transaction or to avoid legal responsibilities. Such companies are not functioning as genuine businesses but rather as tools for deception.

Q6. Can tax evasion lead to veil lifting?

Ans. Yes, if a company is formed or used for the purpose of evading taxes, courts can lift the veil to identify and penalize the individuals involved, as seen in cases like Re Dinshaw Maneckjee Petit.

Q7. Is the veil lifted in group companies?

Ans. In group companies or subsidiaries, the veil may be lifted if one company is merely acting as an agent or puppet of the parent company, especially when there is no real independence or separate existence.

Q8. What’s a landmark case on this topic?

Ans. In Salomon v. Salomon & Co. Ltd., the principle of separate legal personality was established. However, in Gilford Motor Co. v. Horne, the court lifted the veil because the company was used to evade a non-compete clause.

Q9. Does veil lifting apply in criminal cases?

Ans. Yes, if a company is used to commit a crime, courts can pierce the veil to hold the individuals behind the crime responsible. This ensures that corporate structure is not misused to shield unlawful activities.

Q10. Can directors be personally liable?

Ans. Yes, if the veil is lifted, directors and shareholders can be held personally liable for the company’s obligations, especially when they are found guilty of fraud, misrepresentation, or illegal conduct.