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Case Laws pertaining to Lifting up of Corporate Veil Theory

Preamble: 

These case laws are related to the “Concept of Lifting up of Corporate Veil” in the context of Companies. Any concept can be understood in a better way with the help of citations. This Article is a compilation of case laws of the title subject for CA foundation students to help in their study of law subject.

Meaning of corporate veil:

The term corporate veil refers to the concept that members of a company are shielded from liability connected to the company's action. If the company incurs any debts or contravenes any law, the corporate veil concept implies that members should not be liable for those errors.

Case Laws

1. The Salomon vs. Salomon and Co Ltd.:-

Facts: 

Salomon incorporated a company named "Salomon & Co. Ltd.” with seven subscribers consisting of himself, his wife, four sons and one daughter. This company took over the personal business assets of Salomon for £ 38,782 and in turn, Salomon took 20,000 shares of £ 1 each debenture worth £ 10,000 of the company with charge on the company's assets and the balance in cash. His wife, daughter and four sons took up one £ 1 share each. Subsequently, the company went into liquidation due to general trade depression. The unsecured creditors to the tune of £7,000 contended that Salomon could not be treated as a secured creditor of the company, in respect of the debentures held by him, as he was the managing director of one-man company, which was not different from Salomon and outsiders should be paid first. The case is decided that who should be paid first by keeping in view the concept of lifting up of corporate veil. 

Provision of Law:

This question related to the concept of corporate veil theory for companies. Corporate veil concept provides that once a company is validly registered under this act it becomes a separate legal person from its members, for that purpose it is immaterial whether any member has a large or small shareholding.

Conclusion:

A company once registered becomes a separate person and therefore members of the company are also considered as a different person and can claim amount from company just like any other secured creditors. And therefore, in this case Salomon will be paid first as secured creditors.

2. Daimler Company Limited Vs. Continental Tyre & Rubber company:-

Facts:

Continental Tyre and Rubber Company was incorporated in England, but the shareholders of company (except one) and also all the directors, were Germans and residing in Germany. Continental Tyre and Rubber Co Ltd supplied tyres to Daimler Company. But it was concerned with making payment to Continental Tyre and Rubber Company of Germany during World War 2 , the England court decided that Daimler should not trading with Continental Tyre and Rubber company as it was a German (Foreign enemy due to war) Company. The case has been decided in the light of concept of lifting up of corporate veil. 

Provision of Law:-

The concept of lifting of corporate veil says that a company will be regarded as having enemy character if the persons having de facto control of the company are resident of enemy country or whenever they are acting on instruction of enemy, therefore there should be a lifting of corporate veil.

Conclusion:

During the period of war, the concept of lifting up of corporate veil shall be applied to find the enemy factor in the company. Once it can be found out then the company is restricted to trade with the other company of that country.Therefore, in this case, Continental Tyre and Rubber Company could not continue its business Daimler Company limited with in England during World War 2. 

3. Dinshaw Manekjee Petit:

Facts:

Dinshaw Manekjee Petit, an assessee had a large income in the form of dividend and interest. In order to reduce his tax liability, he formed four companies named Petit Limited, The Bombay Investment Company Limited, the Miscellaneous Investment Limited and The Safe Securities Limited and transferred his investments to them in exchange of their shares. The income earned by the companies was taken back by him as pretended loan. Can Dinshaw Manekjee Petit be regarded as separate from the company he formed? 

Provision of law:

The corporate veil says that members of company are shielded from Liability Connected to the company's actions. But if the Company is created just to reduce tax liability of a person then there will be lifting of Corporate veil.

Conclusion:

The developed principle of lifting of the corporate veil was required to be applied in this case because these four Companies are just made in order to reduce tax liability of Dinshaw Manekjee Petit. And therefore, in this case Dinshaw manekjee Petit cannot be regarded as separate from the companies he formed as they are created to reduce the liability of Dinshaw Manekjee Petit.

4. Workmen employed in Associated Rubber Industry limited Vs Associated Rubber Industry limited:-

Facts:

Associated Rubber Industry Limited had invested certain amount some years back. After some years the profit and loss A/c of the company shows large amount of profit.  Thus the company is liable to pay the bonus to its workmen. To reduce this liability, Associated Rubber Industry limited company had formed wholly owned subsidiary company named Aril Holdings Limited which had no assets, no other capital except the shares of INARCO limited that had been transferred by the Associated Rubber Industry limited. It had no other business or the source of income except receiving the dividend on the shares Of INARCO limited.  So at the time of paying bonus to its workmen the company paid very small amount as bonus by saying that the company (Associated Rubber Industry limited) didn’t have large profit. In this case, The Associated Rubber Industry limited had purchased shares of INARCO. So, the workmen went to the court for their bonus. 

Provision of Law:

This question was related to the lifting of corporate veil. Accordingly, if the sole purpose of the formation of the company is just to avoid/reduce legal obligation of the company then there should be the lifting of corporate veil and the company is liable to pay his legal duty. 

Conclusion:

If any company is formed just to reduce or avoid the legal obligation of paying the bonus to its workmen then there is a lifting of corporate veil and the company is liable to pay bonus to its workmen. So in this case also, the company Associated Rubber Industry limited is liable to pay bonus to its workmen as the company have earned large profit.

5. Merchandise Transport limited VS. British Transport commission (1982):

Facts: 

In this case, the principal company, Merchandise Transport Limited, a transport company applied for licence for its vehicles to British Transport Commission but due to some reason British Transport Commission rejected its application and hence the company named Merchandise Transport Limited could not applied in its name. So Merchandise Transport Limited formed a subsidiary company and applied for licence for its (Merchandise Transport Limited) vehicle. Here British Transport Commission rejected its application for licence.

Provision of law:

This question relates to the lifting of corporate veil due to formation of subsidiaries to act as agent. Accordingly, if subsidiary company is formed just to work as an agent, member or trustee on behalf of its principal company then the holding company of that subsidiary company is directly liable for the any act of that subsidiary company. 

Conclusion:

Holding company is directly liable for the act of that subsidiary company which is created just to act as an agent of its parent company. In this case, Merchandise Transport Limited has formed its subsidiary company just to act as an agent. So we considered the both holding and subsidiary company as separate legal entity and therefore British Transport Commission had rejected the application for licence.

6. Gilford motors co. vs. Horne

Facts: 

Mr EB Horne was formerly a managing director of the Gilford Motor Co Ltd. His employment contract stipulated a clause not to solicit customers of the company if he were to leave employment of Gilford Motor Co. Mr. Horne was fired, thereafter he set up his own business and undercut Gilford Motor Co's prices. He received legal advice saying that he was probably acting in breach of contract. So he set up a company, JM Horne & Co Ltd, in which his wife and a friend called Mr Howard were the sole shareholders and directors. They took over Horne’s business and continued it. Mr. Horne sent out fliers saying, The Company had no such agreement with Gilford Motor about not competing. The question arose whether Horne violated his non-compete clause by setting up his competing company or not.

Provision of law:

This case relates to the lifting of corporate veil because of the characteristic of separate legal entity is misused. Accordingly, if the purpose of incorporation of the company is to do fraud or to contravene any law or to avoid any legal obligations (arising by way of contract) or any illegal activity then there is lifting of corporate veil and that particular person/persons are liable for punishment.

Conclusion:

If purpose of incorporation of the company is to defeat law or avoid legal obligation then there is lifting of corporate veil. In this case Mr EB Horne have formed a company, JM Horne & Co Ltd. Just to avoid his legal obligation arise from his contract with Gilford Motor Co. So, YES Mr EB Horne had violated his non-compete clause even if writing clause of the non-competing with Gilford Motor co. 

Reason and necessity of concept of Lifting up of Corporate veil:

If the company is formed for the sole purpose of doing fraud or harm of the society, Regulatory bodies, government than there will be need of lifting up of the corporate veil to find the real beneficiary/culprit or purpose of the Company.
    
The author of this Article is Paragee Patel, CA Foundation Student.

 

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Paragee Patel 
on 04 August 2020
Published in Corporate Law
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