One of the most important feature of a limited liability company is it’s corporate existence distinguished from its members, debtors, creditors,shareholders.

This feature of distinct legal entity has made the company the most famous forms of doing business .The advantages the company form of doing business offers to promoters / founders are manifold.The concept of a company being a separate legal entity was first laid down in the English case of Salomon vs Solomon.This case laid the foundation jurisprudentially for other common law countries on the subject of personality of a company.

The Indian legal system recognizes the existence of a company as a separate legal entity. The Law courts in India have by and large recognized the principle and have held a company to be a separate legal entity.

However this basic tenet of company law has not been without controversy. Time and again the courts have made use of the doctrine famous now as ‘piercing the corporate veil’.Wherein the courts have gone ahead and removed the curtainwhich separates the company from its members and directors so as to ascertain the truth and do justice where it appears necessary to do so. Piercing the veils has its challenges as there are no specific criteria or grounds enumerated by which courts proceed to pierce the corporate veil.

English courts have over the years tried to narrow the scope of operation of the doctrine. A notable case in this regard was a case decided by the UK supreme court in 2013 in Prest vs petrohead .

In the UK the courts have been more reluctant in comparison to their Indian counterparts to lift the corporate veil. This is probably due to the difference in the prevailing philosophy in the two countries where in the united Kingdom the economic scenario is more market oriented, a company is seen more as a essential for the development and for the spirit of entrepreneurship to flourish. Whereas,In India the courts have been more inclined to give regard to the public interest and the interest of all the stakeholders which may be affected by the actions of the company in question.

In a recent case of January 2016, a two judge bench of the Supreme Court comprising of Anil R Dave & Adarsh Kumar Goel JJ in State of Rajasthan & Ors v Gotan lime stone khanji udyog pvt. Ltd. & anr. Held,That lifting of corporate veil shall also apply to cases where transactions relating to transfer of mining leases are involved. The bench speaking through Goel J held that even where the transactions separately viewed are prima facie legal, the Court shall lift the veil to test their true nature .

The Indian legal system recognizes the existence of a company as a separate legal entity. The Law courts in India have by and large recognized the principle and have held a company to be a separate legal entity.

The facts of the case involved the treatment of a mining lease for limestone in Rajasthan. M/s. Gotan

Limestone Khanji Udhyog (GKLU) was a partnership firm that held a mining lease from the Government. After obtaining Government nod, GLKU transferred the lease to a private limited company Gotan Limestone Khanji Udhyog Pvt. Ltd. (GLKUPL), which was incorporated as a result of a conversion of the partnership firm into a private limited company. The partners of the firm became the directors of the company, and the transfer of the lease from the firm to the company did not involve any price. Thus far, there seems nothing patently illegal.But, it is the step that came after that gave rise to the dispute. The shareholders of GLKUPL then sold all of their shares in the company to a subsidiary of Ultra Tech Cement Company Limited (UTCL) for Rs. 160 crores,effectively giving rise to a sale of the mining lease. No separate formalities were followed as it only involved a transfer of shares and not a transfer of the lease,which continued to be held by the company. Several parties, including the State Government, challenged the transaction before the High Court of Rajasthan. Both a single judge as well as (on appeal) a division bench of the High Court upheld the transactions and refused to intervene on the ground that the company is a separate legal personality and that a transfer of shares among shareholders does not affect the existence or character of the mining lease with the company. It is the decision of the division bench that had been challenged before the Supreme Court.

The Supreme Court disagreed with the views of the High Court and decided to quash the  transaction. In doing so, it placed reliance on an earlier decision of the Supreme Court in Victorian Granites (P) Ltd. v. P. Rama Rao, (1996) 10 SCC 665. The Court essentially saw through the entire transaction by corporate veil of GLKUPL. It noted:22. In the present case there are two transactions.

Viewed separately, there may be nothing wrong with either or both but if real nature of transaction is seen,the illegality is patent. In first transaction of transfer of lease from the firm to the company, with the permission of the competent authority, only disclosure made while seeking permission for transfer is of transforming partnership business into a private limited company with same partners as directors without there being any financial consideration for the transfer and without there being any third party. There is perhaps nothing wrong in such transfer by itself. In the second transaction, the entire shareholding is transferred for share price and control of mining lease is acquired by the holding company without any apparent price for lease. Technically lease rights are not sold, only shares are sold. No permission for transfer of lease hold rights may be required. Let us now see the combined effect and real substance of the two transactions. The partnership firm holding lease hold rights has successfully transferred the said rights to a third party for consideration in the form of share price which is nothing but price for sale of mining lease which is not allowed and for which no permission has been granted On the specific legal principle of piercing the corporate  veil, the Court found that the ground of “public interest” is an important one. Moreover, this is to be seen in the light of the purpose of the legislation which is sought to be affected by the transaction. Given that this involved mining lease, which is a public good, it was treated as welfare legislation thereby affecting public interest. As the Court observed:

The principle of lifting the corporate veil as an exception to the distinct corporate personality of a company or its members is well recognized not only to unravel tax evasion but also where protection of public interest is of paramount importance and the corporate entity is an attempt to evade legal obligations and lifting of veil is necessary to prevent a device to avoid welfare legislation. It is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depend on the relevant statutory or other provisions, the object sought. to be achieved, the impugned conduct, the involvement of the element of the public interest, the effect on parties who may be affected etc.

For this reason, the Supreme Court allowed the appeal of the State of Rajasthan

The Principle of separate corporate personality of a company stipulates that the legal personality of a company is separate and distinct from its members. The principle is the bedrock of the limited liability company it encourages entrepreneurs to carry out trade and business which can benefit the economy as a whole.However the courts have stepped in time and again in the interest of justice to balance out the anomalies which can spring up in this sort of business and also so as to ensure the principle is not abused to adversely affect the interests of third parties.

– Alok Sunny