Page 131 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Corporate Legal Framework

Notes Following are some such cases:

1. For the protection of revenue. The Court may not recognise 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.

Example: 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].
2. Where the company is acting as agent of the shareholders, then 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.
3. Where a company has been formed by certain persons to avoid their own valid contractual
obligation, 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 fi led 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).
4. Where a company has been formed for some fraudulent purpose or is a ‘sham’, the court
will lift the corporate veil to identify the perpetrator of the fraud.

Example: 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.
5. Where a company formed is against public interest or public policy, for the purpose of
determining the character of the members, the Court may lift the corporate veil.

Example: C company was floated in London for marketing tyres manufactured in
Germany. The majority of C’s shares were held by the German nationals residing in Germany.
During World War I, C company filed a suit against D company for the recovery of trade debt.

The D company contended that C company was an alien enemy company (Germany being at war
with England at that time) and that the payment of the debt would be a trading with the enemy.
The Court agreed with the contention of the defendants [Daimler Co. Ltd. v. Continental Tyre and
Rubber Co., (1916) 2AC 307].
6. Where device of incorporation is used for some illegal or improper purpose [PNB Finance
Ltd. v. Shital Prasad Jain (1983) 54 Comp. Cas 66 (Delhi)]. S, the financial advisor of a fi nancing

public limited company was given a loan of ` 15 lakhs by the company to purchase
immovable properties in Delhi. A pronote with regard to the same was also executed by S.

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