Introduction
The principle that a company is a legal person distinct from its members is among the most venerable and consequential doctrines in corporate law. Since the House of Lords’ decision in Salomon v. Salomon and Co. Ltd. (1897), courts across common law jurisdictions have affirmed that incorporation creates a new legal personality, that the liabilities of the company are not the liabilities of its members, and that this separation holds even when a single individual effectively controls the company and its affairs. The doctrine of corporate personality is foundational to the entire enterprise of modern commerce, enabling risk-taking, capital formation, and entrepreneurship on a scale that would be impossible if every investor or promoter faced unlimited personal exposure.
Yet the doctrine has always contained within it the seeds of its own limitation. A corporate form deliberately created to perpetrate fraud, to shield fraudulent actors from liability, or to frustrate creditors’ legitimate claims has never received the same judicial solicitude as a genuinely autonomous commercial entity. Indian courts, like their counterparts in England and the United States, have developed the doctrine of “lifting the corporate veil” to deny the protection of separate legal personality in cases where its invocation would amount to facilitating injustice. The problem in India, increasingly acute in the post-2016 Insolvency and Bankruptcy Code era, is that the courts and tribunals applying veil-lifting principles do so with remarkable inconsistency. The NCLT, the High Courts, and the Supreme Court have adopted markedly different approaches, leaving litigants without clear guidance and creating systemic uncertainty about the boundaries of corporate liability.
This article maps that inconsistency, examines its causes, and argues for a statutory framework that would provide principled guidance to adjudicators while preserving the essential integrity of the corporate form.
Legal Framework
The Companies Act, 2013 does not codify a general doctrine of corporate veil lifting. Instead, it provides specific statutory bases for extending liability beyond the company in defined circumstances. Section 339 addresses fraudulent trading, providing that if in the course of winding up it appears that any business of the company has been carried on with intent to defraud creditors or for any fraudulent purpose, the court may declare that any persons knowingly party to such fraud are personally liable for all or any debts of the company. Section 340 extends liability for misfeasance and breach of duty. Section 34(1) imposes liability on subscribers who fraudulently make false statements in the memorandum. Section 447, introduced by the Companies Act, 2013 as a major anti-fraud provision, imposes imprisonment and fines for fraud and defines fraud expansively to include any act with intent to deceive or to gain undue advantage.
The Prevention of Money Laundering Act, 2002 (PMLA) provides an additional and increasingly important mechanism through which corporate structures can be looked through. The Enforcement Directorate’s powers to attach and confiscate proceeds of crime extend to corporate assets where those assets represent or were derived from scheduled offences. The PMLA does not require winding-up proceedings or conviction as a precondition for attachment; provisional attachment orders can be issued during investigation. Courts interpreting the PMLA have repeatedly held that where proceeds of crime have been routed through corporate vehicles, the corporate identity does not prevent the agency from following the money.
The Insolvency and Bankruptcy Code, 2016 introduced Section 66, which addresses fraudulent and wrongful trading in insolvency proceedings. Under Section 66, the NCLT may, on application by a resolution professional or liquidator, declare that a director or partner of a corporate debtor who knew or ought reasonably to have concluded that the company had no reasonable prospect of avoiding insolvency contributed to losses by continuing to incur further debts, and may direct such person to make a contribution to the assets of the corporate debtor. Section 66 also explicitly addresses fraudulent trading. This provision has been invoked with increasing frequency as the IBC regime matured, though its interaction with the broader doctrine of corporate veil lifting remains underdeveloped in judicial reasoning.
Judicial Developments
The Supreme Court’s approach to corporate veil lifting has been cautious and circumstance-specific rather than doctrinal and principled. In Life Insurance Corporation of India v. Escorts Ltd. (1986), the Court identified a range of circumstances where the corporate form might be disregarded, including where companies act as agents for their members or where the corporate form is used to evade legal obligations. However, the Court in that case declined to lay down a general principle, preferring to decide veil-lifting questions on the facts of each case.
The decision in Balwant Rai Saluja v. Air India Ltd. (2014) is perhaps the clearest modern statement from the Supreme Court on the limits of veil-lifting. The Court held that the doctrine of piercing the corporate veil must be applied with caution and in exceptional circumstances only, that mere ownership of a majority of shares in a subsidiary by a parent does not justify treating the two entities as one, and that the corporate form will be disregarded only where the court is satisfied that the legal form of a company was deliberately used to achieve some improper or fraudulent purpose. The Court explicitly resisted the temptation to develop a broad instrumentality or alter ego doctrine along American lines.
The NCLT’s treatment of corporate veil questions in insolvency proceedings has been considerably less disciplined. In the proceedings arising from the Videocon group insolvency, the NCLT and the NCLAT grappled with questions about whether the personal assets of promoters could be reached in satisfaction of corporate debts. The Videocon proceedings involved a complex web of inter-connected companies, related-party transactions, and intra-group fund transfers that had left creditors across multiple group entities exposed. The NCLT bench hearing these matters took an expansive view of the ability to look through corporate structures in insolvency, relying on IBC provisions relating to avoidance transactions and fraudulent trading rather than on veil-lifting doctrine proper. The result was practically significant, but the reasoning was not always clearly grounded in the relevant statutory provisions.
The Jaypee Infratech case presented the NCLT with a particularly challenging situation: homebuyers who had paid for flats under construction agreements held contracts with the corporate debtor Jaypee Infratech Ltd., but the assets of the parent company Jaiprakash Associates Ltd., which had received loans and guarantees from Jaypee Infratech that benefited the parent rather than the project company, were technically beyond the reach of the insolvency proceedings against the subsidiary. The NCLT initially attempted to consolidate proceedings, but was ultimately constrained by the principle that insolvency proceedings address the assets and liabilities of the specific corporate debtor, not of related entities. Homebuyers’ claims against promoter assets required separate litigation rather than being absorbed into the resolution process, illustrating the limits of veil-lifting in an insolvency context even where the equities strongly favoured the vulnerable creditors.
High Court decisions on veil-lifting in fraud cases have created a second layer of inconsistency. The Delhi High Court, in a line of cases involving sham transactions and fraudulently layered corporate structures, has adopted what might be described as a substance-over-form approach, looking beyond the formal structure of corporate ownership to identify the real beneficiaries of transactions and extending liability accordingly. The Bombay High Court has been more formalistic, requiring clear evidence of the corporate form’s use as a cloak for fraud before departing from the Salomon principle. The result is that factually similar cases may be decided differently depending on which High Court has jurisdiction, a situation that undermines legal certainty and creates forum-shopping incentives.
The PMLA proceedings in the Edelweiss and associated cases involving complex financial structures have raised questions about the extent to which attachment orders under the PMLA effectively pierce corporate veils without engaging with veil-lifting doctrine at all. The Enforcement Directorate’s practice of attaching assets across multiple entities in a group structure on the basis that proceeds of crime have flowed through the group has been challenged and upheld with varying degrees of analytical rigour in different High Courts. The Supreme Court’s 2021 decision in Vijay Madanlal Choudhary v. Union of India, while primarily addressing the constitutional validity of PMLA provisions, did not resolve the underlying question of how group liability should be assessed in money laundering investigations.
Contemporary Issues and Analysis
The fundamental problem with India’s current approach to corporate veil lifting is the absence of a coherent analytical framework that courts and tribunals can apply consistently. The question of when the corporate form will be disregarded is answered differently in different proceedings: PMLA proceedings use a follows-the-money approach grounded in the Act’s definition of proceeds of crime; IBC proceedings use avoidance transaction provisions and fraudulent trading provisions; general company law proceedings reference the limited circumstances identified in Supreme Court jurisprudence; and High Court proceedings in civil suits produce varying results depending on the court’s inclination toward formalism or substance-over-form reasoning.
This fragmentation creates perverse incentives. Sophisticated actors can structure their affairs in ways that make corporate veil lifting difficult in any single proceeding, even where the overall pattern of conduct is clearly fraudulent. By contrast, less sophisticated actors who use corporate structures in ways that are commercially inconvenient but not genuinely fraudulent may find their corporate form disregarded by tribunals that are impatient with formal technicalities.
The IBC experience has highlighted a specific tension: the Code is designed to resolve insolvency through a time-bound process focused on the corporate debtor, but the most egregious cases of corporate insolvency involve promoters who have systematically extracted value from the corporate debtor through related-party transactions and then resist liability by invoking the separate legal personality of the companies they used for extraction. The IBC’s avoidance transaction provisions in Sections 43 to 51 are designed to reverse at least some of these transactions, but they are limited in their reach and do not extend to the personal liability of promoters who engineered the transactions.
Comparative and International Perspective
The United Kingdom Supreme Court’s decision in Prest v. Petrodel Resources Ltd. (2013) represents the most sophisticated recent judicial treatment of corporate veil lifting in the common law world. The Court, through Lord Sumption’s judgment, drew a critical distinction between two concepts that had previously been conflated: the “concealment principle,” which involves looking behind a corporate structure to determine the true facts of a situation (and which does not actually involve disregarding the separate personality of the company), and the “piercing principle,” which involves genuinely disregarding corporate personality and is properly confined to cases where a person under an existing legal obligation or liability or subject to an existing legal restriction attempts to use corporate form to evade that obligation.
The Prest distinction is analytically elegant because it shows that many cases that appeared to involve veil-lifting were actually cases of applying ordinary principles of equity or property law through corporate structures without actually disregarding the corporate form. By confining true veil-piercing to a narrow category, the UK Supreme Court reduced the doctrinal uncertainty that had accumulated through decades of imprecise judicial analysis.
The United States maintains a more permissive approach through the alter ego and instrumentality doctrines, which permit veil-piercing in a broader range of circumstances, including undercapitalisation, failure to observe corporate formalities, and commingling of assets. The American approach is more plaintiff-friendly but also more unpredictable, as the multi-factor tests applied by different state courts produce inconsistent outcomes on similar facts.
Australia’s High Court, in Briggs v. James Hardie and Co. Pty Ltd. (1989), largely followed the English approach in declining to develop a broad instrumentality doctrine, while acknowledging that specific statutory provisions might extend liability beyond the corporate entity in defined circumstances. The Australian approach has remained relatively stable since then, with courts generally declining to pierce the corporate veil absent specific statutory authority or clear abuse.
Practical and Policy Implications
The judicial inconsistency in India’s corporate veil lifting doctrine has practical consequences that extend well beyond individual disputes. Creditors, including banks and financial institutions, face uncertainty about whether promoter assets can be reached in cases of fraud, which affects their willingness to extend credit and their approach to security structuring. Foreign investors, accustomed to more predictable legal frameworks in their home jurisdictions, cite legal uncertainty as a factor in their assessment of Indian investment risk. Resolution professionals and insolvency practitioners cannot predict whether the NCLT will look through corporate structures in complex group insolvencies, making it difficult to develop resolution plans that account for the full range of potentially available assets.
For regulators, the inconsistency creates enforcement challenges. The PMLA framework’s broad attachment powers provide one avenue for reaching assets across corporate structures, but the attachment is not the same as personal liability, and the ultimate confiscation of proceeds of crime through that framework does not provide a remedy to civil creditors who seek compensation from promoters. The intersection of criminal law enforcement through PMLA and civil remedies through IBC is poorly managed, with coordination between agencies remaining inadequate and courts in different forums issuing inconsistent orders affecting the same assets.
Suggestions and Reforms
A statutory codification of the circumstances in which corporate personality may be disregarded would be the most significant single reform available. Such a codification should be incorporated into the Companies Act, 2013 through a new provision that: articulates the general principle that corporate personality is to be respected; identifies specific, limited circumstances in which courts may disregard it (including where the corporate form is the direct instrument of fraud, where assets and liabilities of individuals and companies are deliberately commingled to defeat creditors, and where a company is used to evade a specific legal obligation owed by its controller); establishes that mere economic interdependence between related companies is not sufficient for veil-lifting; and requires courts to state explicitly the basis on which they are lifting the veil in any order doing so.
The IBC should be amended to include explicit provisions for extending liability to promoters and related parties in cases of systematic value extraction that can be shown to have contributed to insolvency. The existing fraudulent trading provision in Section 66 is useful but insufficiently specific. A dedicated provision addressing promoter liability in group insolvencies, inspired by the UK’s Sections 213 and 214 of the Insolvency Act, 1986, would provide a clearer statutory basis for NCLT orders extending liability without relying on vague common law veil-lifting principles.
Procedural reforms should ensure that NCLT benches hearing complex corporate group cases include members with expertise in corporate and securities law, rather than exclusively insolvency practitioners. The absence of corporate law expertise in some NCLT benches is a contributing factor to the inconsistent reasoning in veil-lifting decisions.
A joint coordination mechanism between the MCA, the Enforcement Directorate, and the IBBI would help ensure that PMLA attachment orders and IBC insolvency proceedings proceed on compatible assumptions about the corporate structure of group companies, reducing the risk of conflicting orders from different forums.
Conclusion
The corporate veil is not impenetrable, and no mature legal system treats it as such. The question is not whether the veil can be lifted, but when, by whom, and on what basis. India’s answer to those questions is currently scattered across multiple statutes, multiple forums, and multiple lines of judicial reasoning that are not fully consistent with each other. The result is a doctrine that provides neither the security that legitimate corporate actors deserve nor the protection that creditors and the public require against corporate fraud. The path forward lies in statutory clarity, procedural reform, and a commitment to the kind of analytical rigour that the UK Supreme Court demonstrated in Prest. These reforms are overdue and, given the volume of complex corporate fraud cases now moving through India’s courts and tribunals, increasingly urgent.
