Analysis Of Standard Of Proof For Lifting Of The Corporate Veil In Cases Of Fraud

• Published date: 08 December 2022
• Subject Matter: Corporate/Commercial Law, Criminal Law, Corporate and Company Law, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: S&A Law Offices
• Author: Eshita Jain and Jewel Bhateja

INTRODUCTION

Being a body corporate, the word 'Company' has been defined under Section 2(20)¹ of the Companies Act, 2013 as a company incorporated under this Act or under any previous company law. The principle of Company having a legal personality separate from its members can be traced long back in the history of corporate law. Separate legal personality ensues separate rights, obligations, debts, assets, profits and liabilities independent from its directors and shareholders. The separate legal personality of the Company comes into existence right from the date of issuance of certificate of incorporation under the Act.² This principle was long back recognized in the case of Salomon v. A Salomon and Co. Ltd.³ in the words of Lord Macnaghten as, "the company is at law a different person altogether from the subscribers to the memorandum⁴".

The doctrine of separate legal entity is considered as one of the fundamental principles of Company Law. The Hon'ble Supreme Court in A.P. State Road Transport Corporation's case,⁵ observed that the doctrine that a corporation has a separate legal entity is "so firmly rooted in our notions derived from common law that it is hardly necessary to deal with it elaborately".

EVILS OF THE DOCTRINE OF SEPARATE LEGAL ENTITY

Even though this principle stands fundamental in the jurisprudence of Company Law, it gives way to both privileges and scope of misuse. This principle entails that since the company has separate legal personality, it can both sue and be sued in its own name, but the fact remains that its juristic personality makes it dependent on human agencies. These human agents function on behalf of the company but as a natural consequence, are immune from its liabilities. Evaluation in this manner would make the members function dubiously and at the same time avail the privilege of a corporation's separate legal personality. Therefore, to safeguard against such possible misuse, judicial systems across the world have come up with a mechanism to unveil the hideous approach and disregard the separate legal personality in specific circumstances. This is popularly known as 'lifting of the corporate veil', which stands an exception to the doctrine of separate legal existence.

PIERCING OF CORPORATE VEIL AS A MEASURE OF PREVENTING MISUSE OF THE DOCTRINE

In Balwant Rai Saluja v. Air India Ltd.,⁶ the Court observed that "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 v. Salomon & Co. Ltd.⁷ Lord Halsbury LC, negating the applicability of this doctrine to the facts of the case stated that: "a company must be treated like any other independent person with its rights and liabilities (legally) appropriate to itself...whatever may have been the ideas or schemes of those who brought it into existence."

As observed from the above, the doctrine of lifting of the corporate veil traces its origin to the landmark decision of the House of Lords in Salomon v. A Salomon and Co. Ltd.,⁸ wherein the Court for the first time recognized the principle of unveiling the corporate structure. Having...