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Company Law

Notes To investigate the company affairs where it is used for tax evasion or to circumvent tax
obligation;
To investigate if the company is acting as an agent for its shareholders;

To investigate the affairs where it is formed for fraudulent purposes, to defeat and
circumvent the law or to defraud its creditors or to avoid valid obligations.
Bombay High Court in (2004) 121 Comp. Cas 314 has held that the corporate veil may be lifted
to the extent permitted under the statute and no more.
The advantages of incorporation are allowed to be enjoyed only by those who want to make an
honest use of the ‘company’. In case of a dishonest and fraudulent use of the facility of
incorporation, the law lifts the corporate veil and identifies the persons (members) who are
behind the scene and are responsible for the perpetration of fraud.
Following are some such cases:
For the Protection of Revenue: The Court may not recognize the separate existence of
a company where the only purpose for which it appears to have been formed is the
tax-evasion or circumvention of tax obligation. D was a rich man having dividend and
interest income. He wanted to avoid surtax. For this purpose, he formed four private
companies, in all of which he was the majority shareholder. The companies made
investments and whenever interest and dividend incomes were received by the companies,
D applied to the companies for loans which were immediately granted and never repaid.
In a legal proceeding, the corporate veils of all the companies were lifted and the incomes
of the companies treated as if they were of ‘D’ [In re Dinshaw Maneckjee Petit (1927) Bom.
371].
Where the company is acting as agent of the shareholders: In such circumstances, the
shareholders will be held liable for its acts. There may be an express agreement to this
effect or such agreement may be implied from the facts of a particular case.
Where a company has been formed by certain persons to avoid their own valid contractual
obligation: In such conditions, the court may proceed on the assumption as if no company
existed.

Example: A sold his business to B and agreed not to compete with him for a given
number of years within reasonable local limits. A, desirous of re-entering business, in violation
of the contractual obligation, formed a private company with majority shareholdings. B filed a
suit against ‘A’ and the private company and the court granted an injunction restraining ‘A’ and
his company with going ahead in the competing business (Gilford Motor Co. v. Horne (1933) 1
Ch. 935).

Where a company has been formed for some fraudulent purpose or is a ‘sham’: The court
will lift the corporate veil in such circumstances to identify the perpetrator of the fraud. In
Delhi Development Authority v. Skipper Construction Company (P) Ltd. [1996] 4 SCALE
202, the skipper construction company failed to pay the full purchase price of a plot to
DDA. Instead construction was started and space sold to various persons. The two sons of
the directors who had business in their own names claimed that they had separated from
the father and the companies they were running had nothing to do with the properties of
their parents. But no satisfactory proof in support of their claim could be produced. Held,
that the transfer of shareholding between the father and the sons must also be treated as a
sham. The fact that the director and members of his family had created several corporate
bodies did not prevent the court from treating all of them as one entity belonging to and
controlled by the director and his family.

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