The Hindu Business Line : Veils that volumes speak of

LIFTING the veil might have pushed Mehbooba into notoriety, but accountants and judges are no strangers to the art. Only, it is `corporate veil' they get busy with when mischief is smelt behind a company form. A celebrated case that law students are supposed to blurt out even in sleep is Salomon vs Salomon & Co, something more than a 100-years-old, and it spoke of how a company has separate legal existence. However, as the apex court has observed, it becomes necessary that the fiction of veil be lifted and "face examined in substance." At times, this exercise has been called `cracking open the corporate shell', and more violently as `piercing the veil,' in typical Zorro style.

When can you pull down the veil? Cases are many. For instance, when a company registered in England wanted to register its film as an English film, and the censor board there refused, the court refused to interfere because there was a powerful American company that was behind the British one. Similarly, courts have been stern when frauds have come to light, and lifted the veil to find out and expose persons behind the company façade. It is not unusual to find a shady outfit piggy-backing on a charity organisation, or a religious extremist group strutting around under the cloak of business-as-usual.

Company law too recognises the need to go beyond the form. Thus, when the number of members of a company is reduced below seven in the case of a public company, or below two as a private one, liability for company debts would fasten to the members who are continuing business even after six months. That should ring alarm bells in your head, because before a company vanishes, as many have been doing of late, it could well be having you as its sole member!

Tax tomes treasure the Meenakshi Mills verdict that gave the income-tax authorities the right "to pierce the veil of corporate entity and to look at the reality of the transaction to examine whether the corporate entity was being used for tax evasion." That was an old case, about setting up an entity outside British India, but a more recent one was of India Waste Energy Development Ltd. Here, a company transferred its business to another company that was not taxable. A neat tax planning, it may appear to be, but when challenged by the taxman, courts may only be too willing to knock on the veil and say `open sesame.'

In the National Dock Labour Board case, when the court said, "It does indeed seem perhaps to be unseemly that the three companies working in the same geographical location of a dock should be allowed to unveil themselves," what one saw was a Domino effect, with more than one veil getting pinched.

Post 9/11, when Bush went sniffing for blood money on the terrorist trail, it became necessary to look at the substratum of businesses as innocuous as honey. And more recently, the Delhi High Court ordered the e-mail service provider, MSN Hotmail, to provide the details of an unidentified person sending out chain mails using the name of the Tata Group and its Chairman, Ratan Tata; the hacker has been claiming to be involved in the treatment of cancer patients in Dharwad in Karnataka.

That could be a case of piercing the veil, for law tomes to record in future editions.

ExParte@TheHindu.co.in

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