Lifting of Corporate Veil in the Company Law

Company Registration

Lifting of Corporate Veil in the Company Law

Registrationwala

Preface: This post was originally published in 2023 and has been updated on July 16, 2025, to provide you with the most current and accurate information.

The primary reason behind forming a business is to generate profits. When individuals establish a business, they often choose to get it registered as a company under the Companies Act 2013. This is because a company registered under this Act comes with a separate legal entity status and provides limited liability protection to owners.

Although the business owners control the affairs of the company themselves, they get to conduct business in the company’s name. This makes company registration a tempting option. However, at the same time, it allows such owners to conduct potential fraud in the company’s name. 

If the court takes notice of a possible corporate fraud, it may order the lifting of the corporate veil. Want to know what lifting of corporate veil means? Keep reading this article!

Explained: Meaning of Lifting of Corporate Veil

Lifting of corporate veil in company law refers to a legal concept where the court of law disregards the fact that the company is a separate legal identity to hold its owners or directors liable for the company’s actions, debts and other obligations. It is an exception to the general rule that a company is a distinct legal entity from its owners.

The purpose of lifting of corporate veil is to prevent individuals from misuse of corporate structure to conduct wrongdoings. It helps to punish the individuals for illegal activities they conducted in the name of the company.

Common Grounds for Lifting of Corporate Veil

In this section, we shall explain some of the common grounds on which the corporate veil can be lifted:

(a) Misinformation to Subscribed Shareholders on Company’s prospects

If a company misinforms its prospectus, then the following entities authorized for the issue of the such prospectus will be held liable to compensate for every loss incurred to share subscribers:

Such entities can be punished with a jail term of not less than six months, extendable upto ten years. The dynamic personalities will also be liable to a financial penalty of not less than the sum involved in the fraud. The Authority can ask the defaulter to pay at most three times the amount involved in the committed fraud.

(b) Conflicting Nomenclature of the Company

The Companies Regulations of 2014 instructs the Firm to print its name on every official document, including the following:

If a company’s personnel signs, on behalf of the company, on any of the aforementioned documents, then the signatory is liable to the shareholder for the improper name registration of the Company.

(c) Fraudulent Conduct of the Company & its Personnel

When a company is about to close, it comes out that any business has been carried on with intent to cheat the creditors or any other individual, or for any illicit purpose, if the Tribunal thinks it proper so to do, be directed in person liable without limitation to obligation for all or any debts or other obligations of the Company.

(d) Failure to Refund Application Money

According to Companies (Prospectus and Allotment of Securities) Rules, 2014, if a corporation fails to repay application money to applicants who weren’t distributed shares within the prescribed time limit, then the company directors are liable for repayment of application money along with interest. Usually, the interest rate is 15% per annum.

(e) Tax Evasion

Business owners of a company may use a corporate veil for evading taxes or avoiding tax obligations. Since it isn’t possible for the legislature alone to bridge all the gaps in the legal system, the inference of the judiciary is quite necessary. In such situations, the court may pierce the company’s veil to expose the actual state of affairs of the company. Want to know more about tax evasion? Read This Article.

Lifting of Corporate Veil Case Study

Here are some case studies that can help you understand the principle of lifting of corporate veil better:

(a) Littlewoods Mail Order Stores Ltd. vs. IRC5

In Littlewoods Mail Order Stores Ltd vs. IRC5, it was affirmed that a company’s incorporation alone doesn’t cast a complete veil over the corporate personality of a company that is limited by shares. This veil can be pierced by the court to expose the actual perpetrator.

The case held that although a company is considered as a separate legal entity as a general rule, this privilege of legal identity will be disregarded for public interest. Then, the company will be regarded as an association of persons. 

(b) United States vs. Milwaukee Refrigeration Transit Company

In the United States vs. Milwaukee Refrigeration Transit Company, the court stated that a corporation will be considered a legal entity as a general rule. However, when the legal entity notion is used for the purpose of defeating public convenience, justify wrongdoings, defend fraud/crime, the law shall consider a company as an association of individuals.

(c) Singer India Limited vs. Chander Mohan Chadha and Ors. 

The Singer India Limited vs. Chander Mohan Chadha and Ors. case held that the legal concept of separate entity was introduced for the purpose of trade and commerce development and not for illegal or fraudulent acts to dupe the creditor or any other individual. The court may lift the veil of the separate entity to ensure justice for those aggrieved. 

In this case, the court learnt that defendants Chander Mohan Chadha and Ors., had registered multiple businesses for the purpose of syphoning off assets and duping creditors. 

Therefore, to prevent such misuse of corporate structure, the court lifted the veil of separate entities and held the defendants personally accountable for the company’s debts and liabilities.

(d) State of Rajasthan and Ors. vs. Gotan Lime Stone Khanji Udyog Pvt. Ltd. and Ors. 

In the State of Rajasthan and Ors. vs. Gotan Lime Stone Khanji Udyog Pvt. Ltd. and Ors., the Hon’ble Supreme Court opined that, if a company acts against the interest of the public, then its veil can be lifted.

The court’s decision in the Gotan Lime case is a key reform in Indian corporate law. It gives a clear message that corporations can’t use the corporate personality to protect themselves from the liabilities for their illegal activities or unethical conduct. 

Further, the decision also offers a valuable tool for law regulators and enforcement agencies to approach businesses involved in illegitimate acts.

Conclusion

In this blog post, we discussed the meaning of lifting the corporate veil. Basically, it is a legal principle where the tribunal disregards the company’s separate legal entity status to hold company owners and directors accountable for actions, obligations and debts of the company. It prevents individuals from using a company as a shield to avoid responsibility for their activities.

Connect with company registration and post-registration compliance consultants at Registrationwala for assistance in ensuring all the legal and regulatory requirements for business entities in India.

Frequently Asked Questions (FAQs)

Q1. When corporate veil can be lifted?

A. The corporate veil of a company can be lifted by the court if the owners of the company misuse the “separate entity status” of the company to commit fraud, evade taxes or engage in other unethical conduct.

Q2. What is doctrine of lifting of corporate veil?

A. It is a doctrine that disregards the general rule that a company is a separate legal entity, with the intention to hold the owners accountable for the business liabilities and debts, especially when the company’s corporate structure is used for committing fraud or other illicit activities.

 

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