Principles of – Lifting the Corporate Veil

The principle of lifting the corporate veil as an exception to the distinct corporate personality of a company or its members is well recognized not only to unravel tax evasion, CIT v. Sri Meenakshi Mills Ltd., AIR 1967 SC 819 but also where protection of public interest is of paramount importance and the corporate entity is an attempt to evade legal obligations and lifting of veil is necessary to prevent a device to avoid welfare legislation, Workmen v. Associated Rubber Industry Ltd., (1985) 4 SCC 114.

The concept of “piercing the veil” in the United States is much more developed than in the U.K. The motto, which was laid down by Sanborn, J and cited since then as the law, is that “when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons”. The same can be seen in various European jurisdictions.

In Palmer’s Company Law, this topic is discussed in Part II of Vol. 1. Several situations where the court will disregard the corporate veil are set out. The eighth exception runs as under:

‘the courts have further shown themselves willing to “lifting the corporate veil” where the device of incorporation is used for some illegal or improper purpose….where a vendor of land sought to avoid the action for specific performance by transferring the land in breach of contract to a company he had formed for the purpose, the court treated the company as a mere “sham” and made an order for specific performance against both the vendor and the company.’

It is thus clear that the doctrine of lifting the veil can be invoked if the public interest so requires or if there is allegation of violation of law by using the device of a corporate entity. State of Rajasthan  v. Gotan Lime Stgone Khanij Udyog Pvt. Ltd., (2016) 4 SCC 469.

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