Lifting of corporate veil

A company is considered a separate legal person in law. This means that a company has the right to sue and be sued. It also means that the company can own property and has an existence separate from its directors. It also means that for any wrong or fraud that happens in a company, the company as a whole would be persecuted. In certain instances, the directors of companies use this principle to escape from any charges that can be pressed against them for any fraud that they commit. In these instances, the courts adopt what is referred to as lifting the corporate veil, i.e., essentially ignoring the separate personality of the companies. Lifting of Corporate Veil is a practice that is adopted by the judiciary when there is fraud or any wrong or illegal act committed by any company director under the pretense of the company. What it basically means is that, in such instances where the director tries to escape legal action the judiciary has the power to ignore the separate personality of the company persecutes the directors for their actions. This was held in 2 famous cases which are discussed below.

Life Insurance Corporation of India v Escorts Ltd & Others[1]:

This is a landmark judgment where the Court set out basic guidelines as to when can the corporate veil be pierced. This case dealt with a non-resident portfolio investment scheme, which existed under the erstwhile Foreign Exchange Regulation Act, 1973. Under this scheme 13 Caparo companies invested under a single Indian Company which was challenged on the ground that it was an attempt at circumventing the prescribed ceiling of investment of 1%. In the case of Life Insurance Corporation of India v Escorts Ltd & Others, the Supreme Court implemented the concept of the lifting of the corporate veil. In the case, the Court held that in certain exceptional circumstances, it was essential to ignore the corporate separate personality of a company and see the individual aspect of it. These circumstances include a situation where the legislation in contention itself calls for lifting of the corporate veil in order to prevent fraud or wrong conduct or tax evasions or where associated companies are inextricably connected as to be, in reality, part of one concern.

 State of Rajasthan v. Gotan Lime Stone Khanji Udhyog[2]:

The case was one where a partnership firm attempted to convert to a private company in order to transfer a mining lease. The problem associated was that neither was the government informed of this transfer nor was permission for the same obtained.  The basic idea that the Court put forth in the case was that even ‘public interest’ is a consideration in piercing the corporate veil of an entity. The court noted that in isolation both these transactions were within the bounds of law, but seen together in view of other facts and circumstances were patently illegal and ought to be set aside. This meant that the directors would be held liable for their illegal acts, rather than the company as a whole.

[1]  1984 SCR (3) 643

[2] 1973 AIR SC 106

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