SIDDHARTH COLLEGE OF LAW

Lifting the Corporate Veil and Role of Directors in

the Company

“A project submitted to Siddharth College of Law for the Sem III, 2nd Year
LL.B Degree Course”
(Under the guidance of Prof Preeti Brahmania)

Submitted by:
Name: Deepak P Bishnoi
Roll.No. 19
Dated: 18/12/2021 Academic Year 2021-22

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 CONTENTS

Sr.N Topic Name Pg.No

o
1 Introduction : Lifting the corporate veil 3

2 Statutory provisions 4

3 6
Judicial interpretations

4 Companies bill 2011 8

5 Conclusion 9

6 Roles and Duties of a Director in the 10

Company

7 Liabilities of a director under companies 12

act

8 Conclusion 13

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INTRODUCTION

Lifting the corporate veil

Meaning Of the Doctrine:

Lifting the corporate refers to the possibility of looking behind the company’s framework (or
behind the company’s separate personality) to make the members liable, as an exception to
the rule that they are normally shielded by the corporate shell (i.e. they are normally not
liable to outsiders at all either as principles or as agents or in any other guise, and are already
normally liable to pay the company what they agreed to pay by way of share purchase price
or guarantee, nothing more.

When the true legal position of a company and the circumstances under which its entity as a
corporate body will be ignored and the corporate veil is lifted, the individual shareholder may
be treated as liable for its acts.

The corporate veil may be lifted where the statute itself contemplates lifting the veil or fraud
or improper conduct is intended to be prevented.

“It is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is
permissible, since that must necessarily depend on the relevant statutory or other provisions,
the object sought to be achieved, the impugned conduct, the involvement of the element of
public interest, the effect on parties who may be affected, etc.”. This was iterated by the
Supreme Court in Life Insurance Corporation of India v. Escorts Ltd.

The circumstances under which corporate veil may be lifted can be categorized broadly into
two following heads:

1. Statutory Provisions

2. Judicial interpretation

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STATUTORY PROVISIONS

Section 5 of the Companies Act defines the individual person committing a wrong or an
illegal act to be held liable in respect of offenses as ‘officer who is in default’. This section
gives a list of officers who shall be liable to punishment or penalty under the expression
‘officer who is in default’ which includes a managing director or a whole-time director.
Section 45– Reduction of membership below statutory minimum: This section provides that
if the members of a company is reduced below seven in the case of a public company and
below two in the case of a private company (given in Section 12) and the company continues
to carry on the business for more than six months, while the number is so reduced, every
person who knows this fact and is a member of the company is severally liable for the debts
of the company contracted during that time.

In the case of Madan lal v. Himatlal & Co. the respondent filed suit against a private limited
company and its directors for recovery of dues. The directors resisted the suit on the ground
that at no point of time the company did carry on business with members below the legal
minimum and therefore, the directors could not be made severally liable for the debt in
question. It was held that it was for the respondent being dominus litus, to choose persons of
his choice to be sued. 

Section 147- Misdescription of name: Under sub-section (4) of this section, an officer of a

company who signs any bill of exchange, Hindi, promissory note, cheque wherein the name
of the company is not mentioned is the prescribed manner, such officer can be held
personally liable to the holder of the bill of exchange, Hindi etc. unless it is duly paid by the
company. Such instance was observed in the case of Hendon v. Adelman.

Section 239– Power of inspector to investigate affairs of another company in same group or
management: It provides that if it is necessary for the satisfactory completion of the task of an
inspector appointed to investigate the affairs of the company for the alleged mismanagement,
or oppressive policy towards its members, he may investigate into the affairs of another
related company in the same management or group.

Section 275- Subject to the provisions of Section 278, this section provides that no person
can be a director of more than 15 companies at a time. Section 279 provides for a punishment

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with fine which may extend to Rs. 50,000 in respect of each of those companies after the first
twenty.

Section 299- This Section gives effect to the following recommendation of the Company
Law Committee: “It is necessary to provide that the general notice which a director is entitled
to give to the company of his interest in a particular company or firm under the proviso to
sub-section (1) of section 91-A should be given at a meeting of the directors or take
reasonable steps to secure that it is brought up and read at the next meeting of the Board after
it is given. The section applies to all public as well as private companies. Failure to comply
with the requirements of this Section will cause vacation of the office of the Director and will
also subject him to penalty under sub-section (4).

Sections 307 and 308- Section 307 applies to every director and every deemed director. Not
only the name, description and amount of shareholding of each of the persons mentioned but
also the nature and extent of interest or right in or over any shares or debentures of such
person must be shown in the register of shareholders.

Section 314- The object of this section is to prohibit a director and anyone connected with
him, holding any employment carrying remuneration of as such sum as prescribed or more
under the company unless the company approves of it by a special resolution.

 Section 542- Fraudulent conduct: If in the course of the winding up of the company, it

appears that any business of the company has been carried on with intent to defraud the
creditors of the company or any other person or for any fraudulent purpose, the persons who
were knowingly parties to the carrying on of the business, in the manner aforesaid, shall be
personally responsible, without any limitation of liability for all or any of the debts or other
liabilities of the company, as the court may direct. In Popular Bank Ltd., In re it was held that
section 542 appears to make the directors liable in disregard of principles of limited liability.
It leaves the Court with discretion to make a declaration of liability, in relation to ‘all or any
of the debts or other liabilities of the company’. This section postulates a nexus between
fraudulent reading or purpose and liability of persons concerned.

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JUDICIAL INTERPRETATIONS

By contrast with the limited and careful statutory directions to ‘lift the veil’ judicial inroads
into the principle of separate personality are more numerous. Besides statutory provisions for
lifting the corporate veil, courts also do lift the corporate veil to see the real state of affairs.
Some cases where the courts did lift the veil are as follows:

United States v. Milwaukee Refrigerator Transit Company In this case, the U.S. Supreme Court held
that “where the notion of legal entity is used to defeat public convenience, justify wrong, protect
fraud or defend crime, the law will disregard the corporate entity and treat it as an association of
persons.”

Some of the earliest instances where the English and Indian Courts disregarded the principle
established in Salomon’s case are:

Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd this is an instance of
determination of the enemy character of a company. In this case, there was a German company. It
set up a subsidiary company in Britain and entered into a contract with Continental Tyre and Rubber
Co. (Great Britain) Ltd. for the supply of tyres. During the time of war, the British company refused to
pay as trading with an alien company is prohibited during that time. To find out whether the
company was a German or a British company, the Court lifted the veil and found out that since the
decision making bodies, the board of directors and the general body of shareholders were controlled
by Germans, the company was a German company and not a British company and hence it was an
enemy company. 

Gilford Motor Co. v. Horne this is an instance for prevention of façade or sham. In this case, an
employee entered into an agreement that after his employment is terminated he shall not enter into
a competing business or he should not solicit their customers by setting up his own business. After
the defendant’s service was terminated, he set up a company of the same business.

His wife and another employee were the main shareholders and the directors of the company.
Although it was in their name, he was the main controller of the business and the business solicited
customers of the previous company. The Court held that the formation of the new company was a
mere cloak or sham to enable him to breach the agreement with the plaintiff. 

Re, FG (Films) Ltd In this case the court refused to compel the board of film censors to register a film
as an English film, which was in fact produced by a powerful American film company in the name of
a company registered in England in order to avoid certain technical difficulties. The English company

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was created with a nominal capital of 100 pounds only, consisting of 100 shares of which 90 were
held by the American president of the company. The Court held that the real producer was the
American company and that it would be a sham to hold that the American company and American
president were merely agents of the English company for producing the film. 

Jones v. Lipman  In this case, the seller of a piece of land sought to evade the specific performance
of a contract for the sale of the land by conveying the land to a company which he formed for the
purpose and thus he attempted to avoid completing the sale of his house to the plaintiff. Russel J.
describing the company as a “devise and a sham, a mask which he holds before his face and attempt
to avoid recognition by the eye of equity” and ordered both the defendant and his company
specifically to perform the contract with the plaintiff. 

Tata Engineering and Locomotive Co. Ltd. State of Bihar In this case, it was stated that a
company is also not allowed to lay claim on fundamental rights on the basis of its being an
aggregation of citizens. Once a company is formed, its business is the business of an incorporated
body thus formed and not of the citizens and the rights of such body must be judged on that footing
and cannot be judged on the assumption that they are the rights attributable to the business of the
individual citizens. 

N.B. Finance Ltd. v. Shital Prasad Jain In this case the Delhi High Court granted to the plaintiff
company an order of interim injunction restraining defendant companies from alienating the
properties of their ownership on the ground that the defendant companies were merely nominees of
the defendant who had fraudulently used the money borrowed from the plaintiff company and bought
properties in the name of defendant companies. The court did not in this case grant protection under
the doctrine of the corporate veil. 

Shri Ambica Mills Ltd. v. State of Gujarat It was held that the petitioners were as good as parties to
the proceedings, though their names were not expressly mentioned as persons filing the petitions on
behalf of the company. The managing directors in their individual capacities may not be parties to
such proceedings but in the official capacity as managing directors and as officers of the company,
they could certainly be said to represent the company in such proceedings. Also as they were required
to so act as seen from the various provisions of the Act and the Rules they could not be said to be total
strangers to the company petition.

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COMPANIES BILL 2011

India being one of the top three emerging economies, has been longing for strong and cogent
corporate laws that will enable the country’s international trade to conduct its affairs on a par
with the western industrialized nations. The proposals in the Bill are expected to act as a
catalyst to fostering the growth of the economy. One of the main highlights of this Bill is that
it proposes a mechanism for vigilance that will reward whistle blowers. This measure will
allow companies to follow transparency at every move they initiate. The authors have
mentioned a few provisions which bring in responsibilities and liabilities upon a director.

Section 127- A director of a company is punishable with imprisonment or fine if a dividend

which is declared has not been paid or a warrant which in respect thereof has not been posted
within 30 days of the date of declaration.
Section 159 r/w 156- It is the duty of every existing director to intimate his Director
Identification Number to the company or all companies wherein he is a director within one
month of the receipt of the same from the Central Government. If any director of a company
contravenes, such director shall be punishable with imprisonment or with fine under Section
159.
Section 166- Under this section various duties of a director are enumerated such as the duty
of good faith, of due and reasonable care, to act in accordance with the articles of association
etc. Any director in violation of these duties will be punishable with a fine of not less that Rs
1 lakh and not more than Rs 5 lakhs.
Section 184- This section imposes a duty upon a director of a company to disclose his
concern or interest, including shareholding, in any company or companies, or bodies
corporate, companies, firms, or other associations of individuals or if he is a party to any
contract or agreement with a body corporate in which such director holds more than 2%
shareholding or otherwise as mentioned or any firm in which such director is a partner or
owner etc. Sub-section (4) is the penalty clause.
Section 194- This section puts a prohibition in forward dealings of securities of the company,
its subsidiaries or in its holding or associate company by a director of such company. In any
contravention to this effect, the director will be punishable with imprisonment or/and fine as
prescribed.

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CONCLUSION

 It should be noted that the principle of Salomon v. A. Salomon & Co. Ltd. is still the rule and
the instances of piercing the veil are the exceptions to this rule. The legislature and the courts
have in many cases now allowed the corporate veil to be lifted. The principle that a company
has its own separate legal personality of its own finds an important place in the Constitution
of India as well. Article 21 of the Constitution of India, says that: No person shall be deprived
of his life and personal liberty except according to procedure established by law.

Under Article a company also has the right to life and personal liberty as a person. This was
laid down in the case of Chiranjitlal Chaudhary v. Union of India where the Supreme Court
held that fundamental rights guaranteed by the constitution are available not merely to
individual citizens but to corporate bodies as well except where the language of the provision
or the nature of right compels the inference that they are applicable only to natural persons.
So, a corporation can own and sell properties, sue or be sued, or commit a criminal offence
because a corporation is made up of and run by people, acting as agents of the company. It is
under the ‘seal of the company’ that the members or shareholders commit fraud or such acts
and therefore the company should also be liable as it also a person which is accorded
fundamental rights under Article 21 of the Constitution of India.

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Roles and Duties of a Director in the Company

The Power and Duties of a Director

1. A director must act in accordance with the Articles of Association (AOA) of the
company.
2. Fiduciary relationship: A director must pursue the best interests of the stake holders of
the company, in good faith and to promote the objects of the company.

Pre- Incorporation Liability- A Company cannot make a contract before it is incorporated

because, before incorporation, it has no legal existence. Therefore, a Company after
incorporation cannot ratify a contract previously made. It must make a fresh contract. But,
those who act on behalf of the unincorporated company may find themselves personally
liable. In Kelner v. Baxter the Court of Common Pleas held that where a person purports to
sign a contract as agent, but has no principle in existence at the time, he is personally
responsible.

3. Reasonable care: A director shall use independent judgement to exercise his duties
with due and reasonable care, skill and diligence.

In R.K. Dalmia and others v. The Delhi Administration it was held that "A director will be
personally liable on a company contract when he has accepted personal liability either
expressly or impliedly. Directors are the agents or the trustees of a Company."

4. A director should always be aware of conflict of interest situations and should try and
avoid such conflicts for the interest of the company.
5. Before approving related party transactions, the Director must ensure that adequate
deliberations are held and such transactions are in interest of the company.
6. To ensure vigil mechanism of the company and the users are not prejudicially affected
on account of such use.
7. Confidentiality of sensitive proprietary information, commercial secrets, technologies,
unpublished price to be maintained and should not be disclosed unless approved by
the board or required by law.
8. A Director of a Company shall not assign his office and any assignment so made shall
be void (cannot delegate).

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A director is bound by the maxim delegate’s non-protest delegate. Shareholders appoint him
because of their faith in his skill, competence and integrity and they may not have the same
faith in another person. It was held in the case of J.K. Industries v. Chief Inspector of
Factories that the directors being in control of the company’s affairs cannot get rid of their
managerial responsibility by nominating a person as the occupier of the factory.

Independent Director

The Companies Act of 1956 does not give any specific definition of an independent director,
the term was however mention in clause 49 of listening agreement as an independent director
is a non-executive director who does not have any pecuniary relationship with the company,
its promoters, senior management or affiliate companies, is not related to promoters or the
senior management, and/or has not been an executive with the company in the three
preceding financial years. The companies act, 2013 as per schedule VI, assign various roles
and responsibilities on independent directors.

1. Protecting and promoting interests of all and specially for Minority Stakeholders
2. Acting as a mediator in case of Conflict of Interest amongst the stakeholders
3. Assistance in forwarding independent and equitable judgement to the Board of
Directors
4. Adequate attention towards related party transactions
5. Honest and impartial reporting of any unethical behaviour, violation of code of
conduct or any suspected fraud in the company.

In case of violation of these duties, the penal provisions are attracted. The penalty amounts
applicable under Companies Act 2013 are higher in denomination and very stringent
compared to the 1956 amendment. The minimum fine applicable is INR 25, 00/-, whereas
can be even more than INR 25 Crore. Proven Defaulter on Section 166 (codified duties) can
be fined anything between 1-5 lakhs.

Under Companies Act 2013, directors may be held liable as “officers” of the company. The
word “officer” has been defined to include, inter-alia, directors of the company. CA 2013
contains the concept of an ‘officer who is in default’ for the purposes of affixing liability on

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such person in respect of any contravention of the provisions of the CA 2013 by the
company.

 LIABILITIES OF A DIRECTOR UNDER COMPANIES ACT

The Liability of the Directors can be both joint and collective for any and every act
prejudicial to the interests of the company. Though the Director and the Company are
separate entities, under the following cases the Director may be held liable on behalf of the
Company:

1. A director can be made liable for fraud.

“Fraud” in relation to affairs of a company includes “any act, omission, concealment of any
fact or abuse of position committed by any person or any other person with the connivance in
any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of,
the company or its shareholders or its creditors or any other person, whether or not there is
any wrongful gain or wrongful”.

2. Tax Liability

Unless a Director or any Past Director can prove that the non-recovery or non-payment of
Taxes are attributable as gross neglect or breach of duty, then any present or past Director
(pertaining to the time period of defaulter) will be liable to pay the shortfall in tax amount
and any penalty associated.

Under Section 179 of the Income Tax Act 1961, when any private company is wound up and
the tax assessed cannot be recovered, then every person who was a director of the private
company shall be jointly and severely be liable for the payment of such tax. Where the bank
account of a Director was frozen for recovering income tax dues of the Company, it was held
in Gurudas Hazra v. P.K.Chowdhury that it was for the Director to show that the default
on the part of the company was not attributable to any breach of duty on his part.

Refunding of share application or excess in share application money

To pay for qualification shares

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Civil liability in case of misstatement in Prospectus.

Cheques bounced or dishonoured: Under Negotiable Instruments Act 1881, signing of

dishonoured by a Director may lead to prosecution along with the company

Offences under Income Tax Act, 1961

Offences under Labour Laws, specifically in case of Employees Provident Funds and
Miscellaneous Provisions Act, 1952 and Factories Act, 1948

CONCLUSION

The Companies Act 2013 has very well played its role in enacting Corporate Governance in
the very core of the companies’ system.  It needs to be ensured by self that the Directors are
not remaining unadvised, however knowledgeable or experienced someone maybe it will be
prudent practice to legal advice in case of doubts or critical situations. Directors Liability
Insurance is very important for Directors now. In case innocence of the director is proven
such indemnity can be enforced. Hence this is a very important clause for Directors and one
should always be aware of and try to utilize this to the maximum benefit possible. The
Companies Act allows a company for taking insurance for protection against loss caused to it
by Directors, also the Director can take insurance policy to compensate for loss incurred due
to liability to the company for which premium can be paid by company itself.

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