When seven or more person in case of public company and two or more person in case of private company forms a company as per provisions of Companies Act, 2013 they are clothed with corporate personality and there association known by the name of the company. However, sometime this veil of corporate personality is used for some dishonest and fraudulent purpose in that case Court will look into reality and remove the corporate veil.
In the following case the courts have lifted the corporate veil-
(1) Prevention of fraud and misconduct: Where the medium of a company has been used for committing fraud or improper conduct, the Courts have lifted the veil and looked at the realities of the situation. Gilford Motor Co. vs. Horne [1933] Ch 935: In this case 'Horne' had been employed by the company under an agreement that he shall not solicit the customers of the company or compete with it for a certain period of time after having its employment. After ceasing to be employed by the plaintiff, 'Horne' formed a company which carried on a competing business and allotted whole of its shares to his wife and an employee of the company, who were appointed to be its directors. It was held that since the defendant (Horne) in fact controlled the company, its formation was a mere 'cloak or sham' to enable him to break his agreement with the plaintiff. Accordingly, an injunction was issued against him and against the company he had formed restraining them from soliciting the plaintiff's customers.
(2) Company acting as agent: Where the company is in reality an agency or trust for someone else and the corporate facade is used to cover up that agency or trust. Re. FG Films Ltd. (1953) 1 All E.R. 615: FG films wanted Monsoon registered as a British film. It applied to be declared as the 'maker' under the Cinematography Films Act 1936-1948. The Board of Trade refused because it was made by the American Film Group Inc. The American company had promised to finance and provide facilities to the UK company for making the film. 90 shares were held by an American director and 10 by a British one. No shares were held by the third director, who was British. The film was made in India. It was held that the film could not be considered British made, even though the company owning the
rights was a UK company.
(3) Protection of public policy: Where the doctrine conflicts with public policy, Courts have lifted the corporation veil for protecting the public policy. Connors vs. Connors Ltd. (1940) 4 All E.R. 179: In this case the principle was applied against the managing directors he made use of his position contrary to public policy. In this case house of Lord determined the character of company as enemy company, since the person who de facto in control of its affairs where resident of Germany, which was at war with England at that time.
(4) Enemy character of company: Court will lift the corporate veil if the company has enemy character. Daimler Co. Ltd. vs. Continental Tyre & Rubber Co. Ltd. AIR 1927 Bombay 371: A Company was incorporated in London for the purpose of selling tyres manufactured in Germany by a German Company. Its majority shareholder and all the directors were Germans. On declaration of war between England and Germany in 1914, it was held that since both the decision making bodies, the Board of Directors and the general body of shareholders were controlled by Germans, the company was a German company and hence, an enemy company. Accordingly, the suit filed by the company to recover a trade debt was dismissed on the ground that such payment would amount to travelling with enemy.
(5) Evasion of taxes: Where the veil has been used for evasion of taxes and duties, the court upheld the piercing of the veil to look at the real transaction. [Re. Dinshaw Maneckjee Petit A.I.R. 1927 Bombay 371]
(6) To protect labour welfare legislation: Where the purpose of company formation was to avoid the welfare legislation, the Court will lift the corporate veil. Where it was found that the sole purpose for the formation of new company was to use it as a device to reduce the amount to be paid by way of bonus to workman the Supreme Court upheld the piercing of the veil to look at the transaction. [Workmen of Associated Rubber Industries Ltd. vs. Associated Rubber Industries Ltd. A.LR. 1986 SC 1]
(7) Use of corporate veil for hiding criminal activities: Where the defendant used the corporate structure as a device to conceal his criminal activities (evasion of customs and excise duties), the Court could lift the corporate veil and treat the assets of the company as the realizable property of the shareholder.
(8) To punish for contempt of Court: [Jyoti Limited vs. Kamwaljit Kaur Bhasin 32 (1987) DLT 198].
