Updated: Dec 16, 2021
Lifting the Corporation Veil:
Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders. Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it incurs and the sole beneficiary of the credit it is owed. Common law countries usually uphold this principle of separate personhood, but in exceptional situations may "pierce" or "lift" the corporate veil.
A simple example would be where a businessman has left his job as a director and has signed a contract to not compete with the company he has just left for a period of time. If he sets up a company which competed with his former company, technically it would be the company and not the person competing. But it is likely a court would say that the new company was just a "sham", a "cover" or some other phrase, and would still allow the old company to sue the man for breach of contract.
Despite the terminology used which makes it appear as though a shareholder's limited liability emanates from the view that a corporation is a separate legal entity, the reality is that the entity status of corporations has almost nothing to do with shareholder limited liability. For example, English law conferred entity status on corporations long before shareholders were afforded limited liability. Similarly, the Revised Uniform Partnership Act confers entity status on partnerships, but also provides that partners are individually liable for all partnership obligations. Therefore, this shareholder limited liability emanates mainly from statute.
i) The fundamental principle is that an incorporated Company is a legal person and all its actions are that of the Company. The Company is distinct and separate from them in respect of capacity, rights acquired etc (Solomon's case). Taking advantage of this, the directors or officers may use the company as a mask or cloak for fraudulent or illegal activity. In such a case, the court will pierce through the veil to know the reality. This principle is regarded as a curtain or veil between the company and its members. This is the protection enjoyed by the members for the liability of the company. Thus, when there is abuse or misuse by members, they may escape liability but the company would be liable. Here the Court will pierce or lift the screen (Veil) to see the transactions inside the screen. In such a case the protection
given to such Director or Officer is taken away and he becomes liable.
ii) Circumstances to lift the Veil:
a) To find out the enemy character of the Company. This means, during war the Courts may lift the screen to know the persons inside and their character. If they belong to enemy State, the company also has the enemy character. Hence, it will be banned (Dailmer Co. V. Continental Tyre & Rubber Co.).
b) Tax evasion :
If the objective of formation of the Company is tax evasion, then the Courts may tear the Corporate veil. In Dinshaw Maneckji's case, the. court held that the four Companies formed by him, were to avoid super-tax.
In Harald Holdsworth V. Caddies, though there were several subsidiary companies, in reality there was only one Company. Other cases: firestone Tyre & Ruber Co. V. Llewton; Com. of
I.T. V. Sri Meenakshi Mills.
c) Fraud or improper conduct:
The court may pierce the Veil to find out whether the Company was formed to defraud, or to avoid legal obligations. Such sham Companies have no legal status.
The leading case is Gilford Motor C. V. Home. H was an employee of G. Company, but left the job under an agreement not to solicit the customers of G. Company. H. formed a Company carried on a similar business and solicited the customers of G Company. G company sued and the House of Lords granted an injunction against H Company. Though H was bound under an agreement and H Company was separate, still in reality, i.e., by lifting the veil, the court said H Company was a sham or a cloak to engage in business and to solicit the customers of G Company.
d) Agency or trust:
When the company is used as an agency or trust the veil may be lifted. A govt. Company discharging Sovereign functions is a trusteeand hence, courts may lift the screen, to know the functions. If the Company is acting as an agent of the shareholders, theshareholders become liable (Smith Stone etc. V. Brimingham Corporation).
iii) Personal liability of persons: This liability is fixed on the persons in charge of the management by Statutes. These persons are personally liable. Hence the screen can
be lifted, to know the persons responsible.