Lifting the Corporate Veil

Lifting the corporate veil means a court or a statute sets aside, for a limited purpose, the rule that a company is a person separate from its shareholders and directors, and holds the people behind it responsible. In India this happens in two ways: specific sections of the Companies Act, 2013 make directors and officers personally liable for fraud and certain defaults, and courts lift the veil on their own where the company is a sham, a device for fraud or a way to evade the law. It is the exception, not the rule, and the burden lies on the person who asks the court to do it.

This explainer is for B.A. LL.B. and LL.B. students preparing for company law papers, and for readers who deal with small companies in daily life, such as a supplier in Nagercoil who is owed money by a private limited company and wants to know whether its directors can be made to pay. The short answer for that supplier is: usually not, unless fraud or a specific statutory ground can be shown.

What is the veil, and where does it come from?

The veil is the separate legal personality of a company. Section 9 of the Companies Act, 2013 says that from the date of incorporation in the certificate, the subscribers and later members become a body corporate with perpetual succession, able to acquire, hold and dispose of property, to contract, and to sue and be sued in its own name. The debts of the company are its own, not those of its members.

The classic authority is Salomon v A Salomon & Co Ltd [1897] AC 22, decided by the House of Lords. Mr Salomon held almost all the shares, yet the House held that the company was validly incorporated and a distinct person, so he could not be made to answer for its debts. Every answer on this topic starts here, because lifting the veil only makes sense once you have stated the rule it departs from.

Where does the Companies Act itself lift the veil?

A good exam answer separates statutory lifting from judicial lifting. The main statutory provisions are:

• Section 7(7): where a company was incorporated by furnishing false or incorrect information, suppressing material facts or by fraudulent action, the National Company Law Tribunal (NCLT) may, on application, regulate its management, make the liability of members unlimited, remove its name from the register, order winding up or pass any other order, after hearing the company.
• Section 34: where a prospectus contains an untrue or misleading statement, every person who authorised its issue is liable under Section 447.
• Section 35: civil liability to pay compensation to a person who subscribed for securities relying on a misleading prospectus.
• Section 339: if, in the course of winding up, it appears that business was carried on with intent to defraud creditors or for any fraudulent purpose, the Tribunal may, on application of the Official Liquidator, the Company Liquidator, a creditor or a contributory, declare any past or present director, manager or officer, and anyone who knowingly took part, personally responsible, without any limitation of liability, for such debts or other liabilities of the company as it directs. Section 339(3) also exposes them to action under Section 447.
• Section 447: punishment for fraud. For fraud involving at least ten lakh rupees or one per cent of turnover, whichever is lower, the punishment is imprisonment from six months up to ten years and a fine of at least the amount involved, which may go up to three times that amount. Where the fraud involves public interest, the minimum term is three years.
• Section 2(60): the definition of "officer who is in default", which identifies whole time directors, key managerial personnel and certain others as the persons who are personally punished when the Act says the company and every officer in default shall be liable.

The Act has been amended several times, including the fine for smaller frauds under Section 447. Read the current text on India Code or the MCA website before you quote a figure.

When do courts lift the veil without a specific section?

Indian courts have also lifted the veil on general grounds. The clearest recent statement from the Supreme Court is in Vodafone International Holdings B.V. v Union of India, decided on 20 January 2012 by a Bench of Chief Justice S.H. Kapadia, Justice K.S. Radhakrishnan and Justice Swatanter Kumar. The Court accepted that the principle of lifting the veil, or substance over form, applies where an entity is used as a device or conduit, and that a parent and subsidiary may be treated as one in a proper case. It also held that the Revenue must first establish abuse, such as a sham or a tax avoidant transaction, before it can invoke these tests, and that a subsidiary is not simply a puppet of its parent. Genuine tax planning remains permitted.

In reaching that view the Court discussed McDowell and Co. Ltd. v CTO (1985) 3 SCC 230 and Union of India v Azadi Bachao Andolan (2004) 10 SCC 1 on the line between legitimate planning and colourable devices, and the English "look at" approach in W.T. Ramsay Ltd. v IRC.

From these cases and the English decisions students usually read, the recognised grounds are:

1. fraud or improper conduct, where the company is a cloak for a wrong;
2. a sham or façade, as in Gilford Motor Co Ltd v Horne (1933), where a company was formed to evade a personal restraint;
3. evasion of tax or of a law, subject to the Vodafone limits;
4. agency or a single economic unit in a group, used cautiously; and
5. public interest, for example wartime enemy character cases such as Daimler Co Ltd v Continental Tyre and Rubber Co.

The UK Supreme Court narrowed the English position in Prest v Petrodel Resources Ltd [2013] UKSC 34, and Adams v Cape Industries plc (1990) rejected a broad single economic unit theory. Indian courts are not bound by these, but they are often cited.

What about the Madras High Court and criminal cases?

The Madras High Court regularly hears company petitions, recovery suits and cheque bounce matters where a party asks the court to look behind a company. We have not cited a particular Madras High Court judgment here because we could not confirm one from the official record for this article. Students should look up recent decisions on the High Court's website or in a law report and cite the judgment itself.

On the criminal side, offences such as cheating by persons running a company are now prosecuted under the Bharatiya Nyaya Sanhita, 2023, which replaced the Indian Penal Code on 1 July 2024, while offences under the Companies Act itself, such as Section 447, continue under that Act. Personal liability in a criminal case still depends on the role of each accused, not merely on being a director.

How should you write this in an exam?

1. Define corporate personality and cite Section 9 and Salomon.
2. Define lifting the veil in one line and say it is an exception.
3. Give statutory instances: Sections 7(7), 34, 35, 339 and 447, with Section 2(60) for officer in default.
4. Give judicial grounds with cases: Gilford Motor, Vodafone, and the McDowell and Azadi Bachao discussion.
5. Close with the current position: the Indian Supreme Court lifts the veil only on proof of sham, fraud or abuse, and the burden lies on the party alleging it.

A problem question about a tenant in Madurai whose landlord is a one director company that has stopped paying a deposit refund is a good way to practise: ask first whether there is fraud or a statutory ground, and only then whether the director is personally liable. Students who want to work through real cases can volunteer at the college legal aid clinic.

Sources

• Vodafone International Holdings B.V. v Union of India (Indian Kanoon): full text of the Supreme Court judgment of 20 January 2012.
• Companies Bill, 2012 as passed by Lok Sabha (PRS): Bill text as passed on 18 December 2012, including the clauses that became Sections 2(60), 7, 9, 34 and 35.
• Section 339, Companies Act, 2013 (ca2013.com): unofficial reproduction of the section on fraudulent conduct of business.
• Section 447, Companies Act, 2013 (ca2013.com): unofficial reproduction of the fraud punishment and its Explanation.
• Salomon v A Salomon & Co Ltd (Wikipedia): summary of the House of Lords decision reported at [1897] AC 22.
• Piercing the corporate veil (Wikipedia): overview of the English cases, including Gilford Motor, Adams v Cape and Prest v Petrodel.
• India Code: Companies Act, 2013: official listing of rules and notifications under the Act.