Unit 2

Lifting or Piercing the Corporate Veil
What is corporate veil?

Corporate veil helps in differentiate between the personality of corporation from the personality of
its shareholders, and protects them from being personally or individually liable for the company
debts, unlawful Acts, and other obligations.
Lifting of corporate veil:
At times it may happen that the corporate personality of the company is used to commit frauds and
improper or illegal acts. Since an artificial person is not capable of doing anything illegal or
fraudulent, the façade of corporate personality might have to be removed to identify the persons
who are really guilty. This is known as ‘lifting of corporate veil’.
It refers to the situation where a shareholder is held liable for its corporation’s debts despite the
rule of limited liability and/or separate personality. The veil doctrine is invoked when shareholders
blur the distinction between the corporation and the shareholders. A company or corporation can
only act through human agents that compose it. As a result, there are two main ways through
which a company becomes liable in company or corporate law: firstly, through direct liability (for
direct infringement) and secondly through secondary liability (for acts of its human agents acting in
the course of their employment).
There are two existing theories for the lifting of the corporate veil. The first is the “alter-ego” or
other self-theory, and the other is the “instrumentality” theory.
The alter-ego theory considers if there is in distinctive nature of the boundaries between the
corporation and its shareholders.
The instrumentality theory on the other hand examines the use of a corporation by its owners in
ways that benefit the owner rather than the corporation. It is up to the court to decide on which
theory to apply or make a combination of the two doctrines.
Piercing the Corporate Veil
Scenarios under which the Courts consider piercing or lifting the corporate veil are as below, To
Determine the Character of the Company
There are cases where the Courts need to understand if the company is an enemy or friend. In
such cases, the Courts adopt the test of control. The Courts usually avoid piercing the corporate
veil, unless the public interest is in jeopardy. However, to ascertain if a company is an enemy
company, the Court might choose to do so.
So, how can a company be an enemy? It does not have a mind or consciousness and cannot be a
friend or foe, right? However, if the affairs of a company are under the control of people from an
enemy country, then the company might be an enemy too. In such cases, the Court may examine
the character of the humans who are at the helm of affairs of the company.
To Protect Revenue or Tax
In matters concerning evasion or circumvention of taxes, duties, etc., the Court might disregard
the corporate entity.
Imagine a company that is used to evade tax. In such cases, piercing the corporate veil allows the
Court to understand the real owner of the income of the company and make the said person liable
for legitimate taxes.
If trying to avoid a Legal Obligation
Sometimes the members of a company can create another company/subsidiary company to avoid
certain legal obligations. In such cases, piercing the corporate veil allows the Courts to understand
the real transactions.
Imagine a company liable to share 20 percent of its profits with its employees as a bonus. This is a
legal obligation. To avoid this, the company opens a wholly owned subsidiary company and
transfers its investment holdings to it.
The new company formed has no assets of its own and no business income either. It is completely
dependent on the principal company.
By doing so, the principal company reduced the amount of bonus liable to be paid to its
employees. The Courts, by piercing the corporate veil, can understand the real intention of the
principal company and ensure that it fulfils its legal obligations.
Forming Subsidiaries to act as Agents
Sometimes, the basis of the formation of a company is to act as an agent or trustee of its
members or of another company. In such cases, the company loses its individuality in favour of its
principal. Also, the principal is liable for the acts of such a company.
A company formed for fraud or improper conduct or to defeat the law
In cases where a company is formed for some illegal or improper purposes like defeating the law,
the Courts might decide to lift or pierce the corporate veil.

Unit 2

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Unit 2

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Lifting or Piercing the Corporate Veil

What is corporate veil?

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