Doctrine of Corporate Veil and Lifting of Corporate Veil

Statutory Lifting: If the company violates the Companies Act, 2013 and the act provides for the lifting of the veil for the same, then it is termed to be Statutory Lifting.he following are a few examples of such frameworks:-

• Misstatement in Prospectus: It is illegal to make incorrect or false assertions in a company’s prospectus, according to Sections 26 (9), 34, and 35 of the Act. Companies offer securities for sale by releasing prospectuses. The company’s major notes, such as descriptions of shares and debentures, names of directors, principal objects, and current activities, are all present in the prospectus under Section 26.

• Refusal to refund application funds: If the minimum amount has not been subject to subscription and the sum payable on the application has not been receiving within thirty days from the date of issue of the prospectus, under Section 39 (3) of the Act, such officers in default are subject to a fine of one thousand rupees for each day such default continues or one lakh rupees, whichever is less, against allotment of securities.

• Misrepresentation of the company’s name: The company’s name is extremely essential. The corporation can enter into contracts and make them legally binding if it uses an approved name. This authorization of name should take place in advance under Section 4 and be present in accordance with Section 12 of the Act. As a result, any corporate representative who collects invoices or signs on behalf of the firm and enters inaccurate company information may be personally accountable.

• For investigation of ownership of the company: Under Section 216 of the Act, the Central Government has the power to appoint inspectors to investigate and report on matters relating to the company, and its membership for the purpose of determining the true persons who have a financial interest in the success or failure of the company; or who are able to control or to materially influence the policies of the company.

• Fraudulent behaviour: Under Section 339 of the Act, if it comes to light that during the winding up of a business the person is using the company’s name for fraudulent conduct, the Court has the authority to hold any such individual, whether a director, manager or other officials of the company, responsible for such unlawful acts. “Where, therefore, the corporate character is used for the purpose of committing illegality or defrauding others, the court will ignore the corporate character and will look at the reality behind the corporate veil so that it can pass appropriate orders to do justice between the parties concerned,” it was stated in the case Delhi Development Authority vs. Skipper Construction Company.

Judicial Lifting: If the company violates the Companies Act, 2013 and the act does not provide for the lifting of the veil then the judges can order the lifting of the veil which is known as Judicial Lifting.The following are examples of situations where the court may lift the corporate veil:-

• Evasion of taxes: It is the responsibility of every earner to file their Income Tax Return. In the perspective of the law, a corporation is no different from a person. Anyone who tries to escape this obligation in an illegal manner is considered to be committing an offence.

• Fraud/improper behaviour prevention: It goes without saying that no business can conduct fraud on its own. To perform such crimes, there must be a human agent engaging in the act. As a result, the company may take measures to avoid future scams.

• Characterization of the enemy: The goal of forming a business is to make money. A firm will not intentionally try to do good for society. It may, however, choose to bring harm instead.

• Acts of Ultra-Vires are punishable by law: Every company is under obligation to operate in accordance with its Articles of Association, Memorandum of Association, and the Companies Act, 2013. Any activity outside of either’s purview is “Ultra-Vires,” or outside the limit of either’s legal authority. The court may impose Penalties if the company’s operations are illegal.

• Public Policy/Public Interest: When a company’s actions are in violation of public policy or the public interest; courts have the authority to pierce the veil and hold those responsible personally accountable. The right premise for elevating the corporate personality is to preserve the public policy.

Case Law: Re Sir Dinshaw Maneckji Petit Bari, AIR 1927 Bom.371

The fact of the case: The assessee, Sir Dinshaw Manckjee Petit, was a wealthy man enjoying huge income from dividends and interests. He formed four private companies and agreed with each to hold a block of the investment as an agent for it. He credited the income received by him in the accounts of the companies and took it back in the form of a pretended loan. The whole idea was to split his income into four parts with a view to reduce the tax liability.
Held: The company was formed by the assessee with an intention to evade tax and the company was nothing more than the assessee himself. It did undertake any business but was created simply as a legal entity to ostensibly receive the dividends and interests and to hand them over to the assessee as pretended loans. Thus, the corporate veil was lifted and the member behind the veil was held liable.