Corporate Veil Cannot Shield Fraudulent Activities: Legal Position Explained

The doctrine of separate legal personality is a cornerstone of company law, ensuring that a company remains distinct from its shareholders and directors. This principle allows businesses to operate as independent legal entities, shielding their controllers from personal liability.

However, courts have repeatedly emphasised that this veil of incorporation cannot become a tool for deceit or fraud. When corporate structures are misused to perpetrate illegality or evade the law, courts have both the authority and the duty to pierce the corporate veil.

In Hetan Ram Gangwani & Yash Ram Gangwani v. State of Maharashtra (2025:BHC-AS:41371), the Bombay High Court reaffirmed this principle while rejecting the anticipatory bail plea of two businessmen accused of operating multiple shell companies to camouflage illegal trade in adulterated petroleum products.

The judgment not only applies the principle of “lifting the corporate veil” but also reinforces judicial intolerance toward the misuse of corporate personality in economic offences.

Background of the Case

The applicants, Hetan Ram Gangwani and Yash Ram Gangwani, apprehended arrest in connection with Crime No. 346 of 2024 registered with Uran Police Station, Raigad. The offences were registered under several statutes, including:

• Sections 287, 125, and 3(5) of the Bharatiya Nyaya Sanhita, 2023;
• Sections 3 and 7 of the Essential Commodities Act, 1955;
• Sections 3, 4, 6, and 23(a) of the Petroleum Act; and
• Section 4 of the Inflammable Substances Act,

The prosecution alleged that the accused, through three closely linked companies—M/s Sole Bloom Pvt. Ltd., M/s Siddhidhata Trading Company, and M/s Naksh Trading Company—were involved in importing and illegally diverting petroleum products under the guise of “Process Oil-40,” which, on examination, turned out to be adulterated diesel. The applicants sought anticipatory bail under Section 482 of the Bharatiya Nagarik Suraksha Sanhita (BNSS), 2023.

Prosecution’s Allegations

According to the prosecution, eight tankers were discovered in a customs-bonded warehouse, with two of them containing hydrocarbon oil. Laboratory tests revealed that the substance was adulterated diesel fuel. The applicants were accused of orchestrating a network of transactions across different companies to conceal illegal dealings in petroleum products.

During the investigation, it emerged that all three companies shared a common email ID belonging to one of the accused, Yash Gangwani. This suggested unified control and financial management across ostensibly distinct corporate entities.

The prosecution argued that these companies were not genuinely independent but were deliberately layered to mask illegal activity and to give the appearance of legitimate trade.

Applicants’ Defence

The defence raised several objections to the prosecution’s case:

Lack of Authority of Investigating Officers:

The applicants argued that the Assistant Police Inspector (API) who initiated the seizure was not authorised under the Petroleum Orders (1999, 2000, 2005, 1987) or under the Essential Commodities Act. Hence, the registration of the FIR and subsequent actions were illegal.

Improper Seizure and Testing:

They contended that no valid “seizure” occurred under Section 3(j) of the Essential Commodities Act and that the laboratory report was defective as it did not conform to IS 1460:2017 standards for automotive diesel fuel.

Absence of Mens Rea:

The applicants maintained that “Process Oil” was not a notified commodity and that there was no evidence to show that the petroleum product was being sold as automobile fuel.

Reliance on Technicalities:

Citing procedural irregularities, they asserted that any report from a non-NABL-accredited laboratory lacked legal sanctity, rendering the FIR and investigation null.

The applicants thus sought pre-arrest protection, claiming that the investigation was based on unauthorised actions and insufficient evidence.

Prosecution’s Response

Opposing the plea, the prosecution highlighted that:

• The email ID linked to all three firms demonstrated that Yash Gangwani exercised control over every financial transaction.
• The supposed sale of petroleum from one company to another was merely a camouflage, designed to disguise the true ownership and control of the goods.
• Further investigation showed that several purchaser companies listed in the industrial area were fictitious.
• These findings suggested a deliberate and calculated effort to commit economic fraud using multiple legal entities as facades.

Observations of the Court

Justice Amit Borkar, delivering the judgment, analysed the nature of the allegations and the defence raised. The Court noted that although the applicants claimed that the three companies were separate, the linkage through a single personal email ID created a strong presumption of unified control and intent.

The explanation that a Chartered Accountant might have used the same email for convenience was rejected as implausible.

The Court observed:

“Ordinarily, when three companies claim to operate as separate legal entities, their banking operations are expected to be maintained independently. If all three accounts are connected with the same email ID, the natural inference is that one person has access to and control over the financial dealings of all these concerns.”

This factual interlinking led the Court to hold that the alleged corporate separateness was an illusion—a camouflage to divert imported petroleum products and conceal their true nature.

Application of the Doctrine of Lifting the Corporate Veil

At the heart of the judgment lies the application of the doctrine of lifting the corporate veil. The Court stated that while companies are generally treated as distinct legal entities, this fiction cannot be permitted to facilitate fraud. Justice Borkar categorically held:

“The principle of lifting the corporate veil can be applied in such cases where companies are used as instruments for fraudulent activities.”

The Court emphasised that the law allows this doctrine to be invoked whenever the corporate form is misused to perpetrate illegality, evade obligations, or defeat public policy. Here, the multiple companies controlled by the same individuals were used as tools for deception. Consequently, the directors could not hide behind the veil of incorporation.

Public Interest and Economic Offences

The Court placed significant weight on the public-interest dimension of the case. It observed that offences under the Essential Commodities Act and Petroleum Act are not private disputes but matters that directly affect society. The adulteration of fuel, the Court noted, endangers public safety, damages machinery, and undermines the nation’s economy. Such actions also erode public confidence in regulatory systems designed to ensure purity and fairness in essential goods distribution.

Justice Borkar cautioned that the circulation of adulterated fuel “not only damages vehicles and machinery but may also endanger human life due to risks of fire or explosion.” Hence, these offences warranted a stringent approach.

Rejection of Anticipatory Bail

While the applicants argued procedural irregularities, the Court made it clear that anticipatory bail is an extraordinary relief reserved for exceptional cases. At this stage, the Court is not to conduct a mini-trial or examine evidentiary nuances. Instead, it must assess the gravity of allegations and the necessity of custodial interrogation.

Finding prima facie material indicating manipulation through multiple shell entities and adulteration of petroleum, the Court held that custodial interrogation was essential to uncover the larger conspiracy and trace the money trail. Accordingly, the anticipatory bail plea was rejected.

Judicial Reasoning: Why the Corporate Veil Was Lifted

The Court’s reasoning provides valuable insight into the circumstances justifying the lifting of the corporate veil:

1. Common Control and Shared Communication Channel: The same email ID linked to all corporate bank accounts demonstrated centralised control, defeating the notion of independence.
2. Layered Transactions Creating False Appearance: The alleged sale and purchase between the three companies were merely paper transactions designed to give legitimacy to illegal trade in petroleum products.
3. Front Companies Used to Conceal True Intent:
   The Court found that one accused, Rakesh More, was used as a front to distance the real controllers (the Gangwani brothers) from accountability.
4. Public Interest and Potential Harm: Since adulteration of fuel impacts public welfare, the Court invoked public-policy grounds to deny corporate immunity.

These factors collectively justified piercing the corporate veil to attribute liability directly to the individuals behind the façade.

Conclusion

The Hetan Ram Gangwani judgment stands as a significant reaffirmation of the principle that corporate personality is a legal privilege, not a licence for fraud. The High Court meticulously analysed the factual matrix—common email IDs, layered transactions, and fictitious entities—to reveal a coordinated scheme of deception. By lifting the corporate veil, the Court looked beyond formal ownership to uncover the reality of control and culpability.

This case exemplifies the evolving judicial stance that economic offences involving the misuse of corporate structures will not be tolerated. The message is unequivocal: when companies become instruments of fraud, the law will not hesitate to pierce their façade and hold the real perpetrators accountable.

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