Piercing / Disregarding the Corporate Veil III

The doctrine of piercing the corporate veil is as well settled as the Salomon, [1897] AC 22 principle itself. In Life Insurance Corporation of India v. Escorts Ltd., (1986) 1 SCC 264, this Court held:

Generally and broadly speaking, we may say that the corporate veil may be lifted where a statute itself contemplates lifting the veil, or fraud or improper conduct is intended to be prevented, or a taxing statute is sought to be evaded or where associated companies are inextricably connected as to be, in reality, part of one concern.

This statement of the law was followed in Union of India v. ABN Amro Bank, (2013) 16 SCC 490. Similarly in Balwant Rai Saluja v. Air India Ltd., (2014) 9 SCC 407, this Court in following Escorts Ltd., held:

The doctrine of “piercing the corporate veil” stands as an exception to the principle that a company is a legal entity separate and distinct from its shareholders with its own legal rights and obligations. It seeks to disregard the separate personality of the company and attribute the acts of the company to those who are allegedly in direct control of its operation. The starting point of this doctrine was discussed in the celebrated case of Salomon. Most of the cases subsequent to Salomon attributed the doctrine of piercing the veil to the fact that the company was a “sham” or a “façade”. However, there was yet to be any clarity on applicability of the said doctrine. In recent times, the law has been crystallized around the six principles formulated by Munby J. in Ben Hashem v. Ali Shayif, 2008 EWHC 2380 (Fam). The principles laid down by Ben Hashem have been reiterated by the UK Supreme Court by Lord Neuberger in Prest v. Petrodel Resources Ltd., (2013) 2 AC 415, UKSC at para 64. Lord Sumption…

Similarly in Delhi Development Authority v. Skipper Construction Company (P) Ltd., (1996) 4 SCC 622…

It is thus clear that, where a statute itself lifts the corporate veil, or where protection of public interest is of paramount importance, or where a company has been formed to evade obligations imposed by the law, the Court will disregard the corporate veil. Further, this principle is applied even to group companies, so that one is able to look at the economic entity of the group as a whole.

Hon’ble Justice R.F. Nariman, ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta, [Civil Appeal Nos. 9402-9405 OF 2018].

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When the history of the corporate veil is written, the year 2013 will perhaps be given as much prominence as the year 1897. The UK Supreme Court allowed Mrs. Prest’s Appeal. The judgment of Lord Sumption contains a masterly analysis and is likely to become the definitive authority on corporate veils, in the years ahead. 

Much of the confusion in the case law has arisen from a failure to distinguish between “the concealment principle” and “the evasion principle”. The concealment principle is, in fact, not an instance of piercing the veil but is the principle that “the interposition of a company… so as to conceal the identity of the real actors will not deter the Courts from identifying them, assuming their identity is legally relevant”. The evasion principle is the only real instance of piercing the veil. This is done if “there is a legal right against the person in control of the company which exists independently of the company’s involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement”.

Lord Sumption illustrates the difference between the concealment principle and the evasion principle by comparing, on the one hand, Gilford Motor Co v. Horne [1933] Ch. 935 and Jones v. Lipman [1962] 1 WLR 832 with, on the other, Genco ACP v. Dalby, [2000] 2 BCLC 734 and Trustor AB v. Smallbone (No 2), [2001] 1 WLR 1177).

Lord Neuberger demonstrates that in some eighty years of its existence, the doctrine of piercing the veil has not been successfully and correctly invoked even once. Lord Neuberger and Lord Sumption agree that there is a ‘necessity’ threshold to cross before the veil can be pierced: that is, contrary to what the Court of Appeal decided in VTB Capital, the veil should not be pierced even where the evasion principle applies, if other appropriate remedies are available to the claimant. Lord Neuberger and Lord Sumption differ in their treatment of the important cases of Gilford Motor Co v. Horne and Jones v. Lipman. To Lord Sumption, these cases illustrate the evasion principle insofar as an order was made against the company; to Lord Neuberger these cases wrongly invoked the doctrine of piercing the veil and the order made against the company can be explained on the basis of agency.

It is evident, especially after Petrodel Resources, that the law in India could not be more different. However, since the Supreme Court is yet to deeply examine the question in the light of recent developments, the scope of the corporate veil remains an open question in India.