While separate personality is the rule, individuals cannot use the corporate form as a cloak for fraud or illegal acts. In such cases, the law 'lifts the corporate veil' to identify the real individuals behind the corporate screen.
1. Judicial Grounds for Lifting the Veil
Courts will ignore the separate entity rule under the following equitable circumstances:
- Prevention of Fraud or Improper Conduct:
Gilford Motor Co. v. Horne (1933): An employee bound by a non-compete covenant incorporated a company to solicit his former employer's clients. The court lifted the veil, held that the company was a mere sham to breach the covenant, and issued an injunction. - Determination of Enemy Character:
Daimler Co. Ltd. v. Continental Tyre & Rubber Co. (1916): A company incorporated in England had all German directors and shareholders. During WWI, the court lifted the veil to hold that the company possessed enemy character and could not sue in English courts. - Tax Evasion:
Re Dinshaw Maneckjee Petit (1927): An assessee transferred huge dividend incomes to four sham companies created solely to convert taxable income into non-taxable "loans." The court lifted the veil and taxed the individual. - Group Companies / Single Economic Entity: When multiple subsidiary companies operate under the absolute control of a parent company as a single economic unit.
2. Statutory Grounds under Companies Act, 2013
The Act expressly lifts the veil and imposes personal liability on directors and members in cases like:
- Misstatement in Prospectus (Sections 34 & 35): Criminal and civil liability for misstatements.
- Fraudulent Conduct of Business (Section 339): Personal liability for all debts during winding up if the company's business was conducted to defraud creditors.
- Failure to Return Application Money (Section 39): Directors are personally liable if minimum subscription is not raised and returned in time.